|
Archive@NYU >
Stern School of Business >
Salomon Center >
Derivatives Research >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26818
|
| Title: | The Link between Default and Recovery Rates: Theory, Empirical Evidence
and Implications |
| Authors: | Altman, Edward I.
Brady, Brooks
Resti, Andrea
Sironi, Andrea |
| Keywords: | credit rating
capital requirements
credit risk
recovery rate
default
procyclicality |
| Issue Date: | Mar-2003 |
| Series/Report no.: | S-DRP-03-08 |
| Abstract: | This paper analyzes the association between aggregate default and
recovery rates on credit assets, and seeks to empirically explain this
critical relationship. We examine recovery rates on corporate bond
defaults, over the period 1982-2002. Our econometric univariate and
multivariate models explain a significant portion of the variance in
bond recovery rates aggregated across all seniority and collateral
levels. The central thesis is that aggregate recovery rates are
basically a function of supply and demand for the securities, with
default rates playing a pivotal role. Such a link would bring about a
significant increase in both expected and unexpected losses as measured
by some widespread credit risk models, and would affect the
procyclicality effects of the New Basel Capital Accord. Our results have
also important implications for investors in corporate bonds and bank
loans, and for all markets (e.g., securitizations, credit derivatives,
etc.) which depend on recovery rates as a key variable. |
| URI: | http://hdl.handle.net/2451/26818 |
| Appears in Collections: | Derivatives Research
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
