On the Way to Recovery: A Nonparametric Bias Free Estimation of Recovery Rate Densities

Olivier Renault and Olivier Scaillet
Additional contact information
Olivier Renault: Standard and Poor’s Risk Solutions

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: In this paper we analyse recovery rates on defaulted bonds using the Standard and Poor’s/PMD database for the years 1981-1999. Due to the specific nature of the data (observations lie within 0 and 1), we must rely on nonstandard econometric techniques. The recovery rate density is estimated nonparametrically using a beta kernel method. This method is free of boundary bias, and Monte Carlo comparison with competing nonparametric estimators show that the beta kernel density estimator is particularly well suited for density estimation on the unit interval. We challenge the usual market practice to model parametrically recovery rates using a beta distribution calibrated on the empirical mean and variance. This assumption is unable to replicate multimodal distributions or concentration of data at total recovery and total loss. We evaluate the impact of choosing the beta distribution on the estimation of credit Value-at-Risk.

Keywords: default; recovery; kernel estimation; credit risk (search for similar items in EconPapers)
JEL-codes: C13 C14 C51 G18 G21 G33 (search for similar items in EconPapers)
Date: 2003-05
New Economics Papers: this item is included in nep-fin
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.swissfinanceinstitute.ch/rp83.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.swissfinanceinstitute.ch/rp83.pdf [301 Moved Permanently]--> https://www.sfi.ch/rp83.pdf [302 Found]--> https://www.sfi.ch/en/rp83.pdf)

Related works:
Journal Article: On the way to recovery: A nonparametric bias free estimation of recovery rate densities (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fam:rpseri:rp83

Access Statistics for this paper

More papers in FAME Research Paper Series from International Center for Financial Asset Management and Engineering Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().