PT  - JOURNAL ARTICLE
AU  - Sugato Chakravarty
AU  - Padma Kadiyala
TI  - Ex Ante Estimation of a Firm's Distress Risk Parameters from Bond Transaction Data
AID  - 10.3905/jfi.2009.19.2.006
DP  - 2009 Sep 30
TA  - The Journal of Fixed Income
PG  - 6--22
VI  - 19
IP  - 2
4099  - https://pm-research.com/content/19/2/6.short
4100  - https://pm-research.com/content/19/2/6.full
AB  - In this paper, we exploit the information in a publicly traded company’s stock and bond prices to es-timate its default probability and recovery rate. We document that estimated probabilities of default and recovery rates exhibit cross-sectional variation with the ratio of book to market equity and with industry affiliation. Additionally, dividend yield, and the term premium in Treasury bond yields influ-ence temporal variation in aggregate probabilities of default and in recovery rates. Such findings provide a deeper understanding of how default probability and recovery rate interact to determine the outcome when a firm ends up in financial distress.TOPICS: Fixed-income portfolio management, credit risk management, fundamental equity analysis, statistical methods