In this work, we model the empirically observed recovery risk premium by adding an additional correlated risk driver to Merton’s model for pricing corporate bonds. This risk driver represents the ...

Structural models of default are widely used to analyze corporate bond spreads, but have generally been unable to explain why risk premiums are as high as they are. This credit spread puzzle can be ...

Traders in bonds and credit default swaps are bombarded with information on the default probabilities implied by credit spreads using a simple ratio. This ratio predicts that the credit spread will be ...