Dependence of Default Probability and Recovery Rate in Structural Credit Risk Models: Case of Greek Banks

Abdelkader Derbali () and Lamia Jamel
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Abdelkader Derbali: University of Sousse

Journal of the Knowledge Economy, 2019, vol. 10, issue 2, No 12, 733 pages

Abstract: Abstract The main idea of this paper is to examine the dependence between the probability of default (PD) and the recovery rate (RR). For the empirical methodology, we use the bootstrapped quantile regression and the simultaneous quantile regression for a sample of 17 Greek banks listed in Athens Exchange over the period of study from January 02, 2006 to December 31, 2012. The measurement of this dependence is determined by using seven indicators such as the probability of default, the recovery rate, the number of defaults, the expected value of losses, the growth rate of GDP in Greece, and three dummy variables (the exit of another firm of the Athens Exchange, the new firm is listed in the Athens Exchange, and the date of the failure of Greece). The main empirical results show that the probability of default and the recovery rate are inversely related. Based on this result, the banks are obliged to maximize their recovery rate to reduce their probability of default.

Keywords: Probability of default; Recovery rate; Number of default; Expected value of losses; Bootstrapped quantile regression; Simultaneous quantile regression (search for similar items in EconPapers)
JEL-codes: C14 C15 G12 G21 G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Working Paper: Dependence of default probability and recovery rate in structural credit risk models: Case of Greek banks (2018)
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DOI: 10.1007/s13132-017-0473-1

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