The Dependence of Recovery Rates and Defaults

Perraudin, William Robert Maurice; Hu, Yen-Ting

doi:10.2139/ssrn.1961142

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The Dependence of Recovery Rates and Defaults

Risk Control Research Paper No. 6/1

28 Pages Posted: 29 Nov 2011

See all articles by William Robert Maurice Perraudin

William Robert Maurice Perraudin

Risk Control Limited

Yen-Ting Hu

affiliation not provided to SSRN

Date Written: February 1, 2006

Abstract

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: 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: https://ssrn.com/abstract=1961142 or http://dx.doi.org/10.2139/ssrn.1961142