A Multi-Factor Approach for Systematic Default and Recovery Risk
The Basel II Risk Parameters, 2006, pp. 105-126
32 Pages Posted: 10 Nov 2013 Last revised: 13 Nov 2013
Date Written: 2005
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: Suggested Citation