Default and Recovery Risk Dependencies in a Simple Credit Risk Model

Benjamin Bade, Daniel Roesch and Harald Scheule ()
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Benjamin Bade: Institute of Banking & Finance, Leibniz University of Hannover
Daniel Roesch: University of Regensburg
Harald Scheule: Finance Discipline Group, University of Technology Sydney, https://profiles.uts.edu.au/harald.scheule

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper provides evidence for the relationship between credit quality, recovery rate, and correlation. The paper finds that rating grade, rating shift, and macroeconomic factors provide a highly significant explanation for default risk and recovery risk of US bond issues. The empirical data suggest that default and recovery processes are highly correlated. Therefore, a joint approach is required for estimating time-varying default probabilities and recovery rates that are conditional on default. This paper develops and applies such a model.

Keywords: asset value; correlation; credit portfolio; loss given default; Merton model; probability of default; recovery; volatility (search for similar items in EconPapers)
JEL-codes: C51 G20 G28 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2011-01-01
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Citations: View citations in EconPapers (16)

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