A Multi-Factor Approach for Systematic Default and Recovery Risk

Journal of Fixed Income, Vol. 15, No. 2, 2005, pp. 63-75

The Basel II Risk Parameters, 2006, pp. 105-126

32 Pages Posted: 10 Nov 2013 Last revised: 13 Nov 2013

See all articles by Daniel Roesch

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: 2005

Abstract

The following article develops a simultaneous multi-factor model for defaults and recoveries. Applying this model, risk parameters can be forecast using systematic and idiosyncratic risk fac-tors and their implied correlations. The theoretical framework is accompanied by an empirical analysis in which a negative correlation between defaults and recoveries over the business cycle is observed. In the study, default and recovery rates are modeled by business cycle indicators and the properties of the economic and regulatory capital given these risk drivers are shown.

Suggested Citation

Roesch, Daniel and Scheule, Harald, A Multi-Factor Approach for Systematic Default and Recovery Risk (2005). Journal of Fixed Income, Vol. 15, No. 2, 2005, pp. 63-75, The Basel II Risk Parameters, 2006, pp. 105-126, Available at SSRN: https://ssrn.com/abstract=2349618

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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