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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27047

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-FI-03-19
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/2451/27047
Appears in Collections:Financial Institutions

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