We compare the durations of corporate and Treasury bonds in the reducedform, intensity based credit risk modeling framework. In the case where default risk is independent of default-free interest rates, we provide in each of the three most popular recovery regimes a sufficient condition under which the duration of the corporate bond is smaller than the duration of a similar Treasury bond. In th...

We embed systematic default, procyclical recovery rates and habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to the real economy—and not to bond prices—can simultaneously explain several key empirical regularities ...

The reduced form models have been widely used in the literature to price the credit risk of defaultable assets. However, little has yet been done in using the reduced form model as a portfolio risk management tool. In this study, we propose a multi-firm reduced form model and use it to measure portfolio credit risk. We calibrate and back-test our model using corporate bond prices. Our results s...

We propose an approach to optimally select corporate bond portfolios based on bond-specific characteristics (maturity, credit rating, coupon, illiquidity, past performance, and issue size) and macroeconomic conditions (recessions and macroeconomic uncertainty measures). The approach relies on a parametric specification of the portfolio weights and allows us to consider a large cross-section of ...

We study defaultable bond prices in the Black–Cox model with jumps in the asset value. The jump-size distribution is arbitrary, and following Longstaff and Schwartz (1995) and Zhou (2001) we assume that, if default occurs, the recovery at maturity depends on the ‘severity of default’. Under this general setting, the vehicle for our analysis is an integral equation. With the aid of this, we prov...

This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default ...

This paper develops a theory of bond pricing in which a firm’s instantaneous probability of default is allowed to depend on its credit rating as well as on a latent systematic factor. We examine two versions of the model, one with fixed probabilities of ratings changes and another in which the probability of rating changes varies with the systematic factor. We estimate the model in a Bayesian c...