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The Link Between Default and Recovery Rates: Theory, Empirical Evidence and Implications
Year Of Publication: 2003
Month Of Publication: March
Pages: 27
Download Count: 792
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 7-29-2004
Publisher: Administrator
This paper analyzes the association between aggregate default and recovery rates on creditassets, and seeks to empirically explain this critical relationship. We examine recovery rates oncorporate bond defaults, over the period 1982-2002. Our econometric univariate andmultivariate models explain a significant portion of the variance in bond recovery ratesaggregated across all seniority and collateral levels. The central thesis is that aggregaterecovery rates are basically a function of supply and demand for the securities, with defaultrates playing a pivotal role. Such a link would bring about a significant increase in bothexpected and unexpected losses as measured by some widespread credit risk models, and wouldaffect the procyclicality effects of the New Basel Capital Accord. Our results have also importantimplications 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.
Altman, Edward I. Sign in to follow this author
Brady, Brooks Sign in to follow this author
Resti, Andrea Sign in to follow this author
Sironi, Andrea Sign in to follow this author
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