The Dependence of Recovery Rates and Defaults

Risk Control Research Paper No. 6/1

28 Pages Posted: 29 Nov 2011

Date Written: February 1, 2006


In standard ratings-based models for analyzing credit portfolios and pricing credit derivatives, it is assumed that defaults and recoveries are statistically independent. This paper presents evidence that aggregate quarterly default rates and recovery rates are, in fact, negatively correlated. Using Extreme Value Theory techniques, we show that the dependence affects the tail behavior of total credit loss distributions and leads to higher VaR measures.

Keywords: default rates, recovery rates, extreme value theory, VaR

JEL Classification: G19

Suggested Citation

Perraudin, William Robert Maurice and Hu, Yen-Ting, The Dependence of Recovery Rates and Defaults (February 1, 2006). Risk Control Research Paper No. 6/1, Available at SSRN: or

William Robert Maurice Perraudin (Contact Author)

Risk Control Limited ( email )

13-14 Dean Street
London, SE21 8LU
United Kingdom

Yen-Ting Hu

affiliation not provided to SSRN ( email )