Journal of Financial and Quantitative Analysis Vol. 60 No. 5 2025

The Valuation of Corporate Coupon Bonds

Jens Hilscher¹; Robert A. Jarrow²; Donald R. van Deventer³

¹ University of California · ² Cornell University Samuel Curtis Johnson Graduate School of Management · ³ SAS Institute Inc.

Abstract

This article proposes and estimates a tractable, arbitrage-free valuation model for corporate coupon bonds that includes a more realistic recovery rate process. Most existing studies use a recovery rate process that is misspecified because it includes recovery for coupons due after default. Misspecification errors from assuming recovery on all coupons can be substantial; they increase with recovery rates, coupons, maturity, and default probabilities. For a large sample of market transactions, i) our model has lower pricing errors than one assuming recovery on all coupons and ii) the magnitude of our model’s outperformance is linked to misspecification errors from assuming recovery on coupons.

DOI

10.1017/s0022109024000401

Volume

60

Issue

5

Pages

2259-2292

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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