How to Price Recovery Risk
CreditFlux, April 2015
2 Pages Posted: 27 May 2015 Last revised: 13 Jun 2015
Date Written: May 26, 2015
Abstract
We present a method to incorporate stochastic recovery into the classical Merton and Black-Cox models that allows for the separation of the recovery risk premium from the default risk premium. We compute closed-form solutions for zero-coupon bonds, credit spreads and credit default swaps. With some additional complexity, the methodology can also be extended to other credit products, including coupon-bearing bonds.
Suggested Citation: Suggested Citation
Cohen, Albert and Costanzino, Nick, How to Price Recovery Risk (May 26, 2015). CreditFlux, April 2015, Available at SSRN: https://ssrn.com/abstract=2610927
Feedback
Feedback to SSRN
If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday.