Default and Recovery Risk Dependencies in a Simple Credit Risk Model

Benjamin Bade, Daniel Rösch and Harald Scheule

European Financial Management, 2011, vol. 17, issue 1, 120-144

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.

Date: 2011
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https://doi.org/10.1111/j.1468-036X.2010.00582.x

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