Recovery Rates: Uncertainty Certainly Matters

39 Pages Posted: 6 May 2019

See all articles by Paolo Gambetti

Paolo Gambetti

Louvain Finance Center (LFIN), UCLouvain

Geneviève Gauthier

Department of decision Sciences and GERAD; Associate member, Oxford-Man Institute (OMI)

Frédéric D. Vrins

LFIN/LIDAM, UCLouvain; Center for Operations Research and Econometrics (CORE), UC Louvain

Date Written: April 5, 2019

Abstract

Previous studies identify default rates as the main systematic determinant of bonds' recovery rates. In this work, we revisit this paradigm by investigating the impact of another factor: economic uncertainty. We study the influence of the latter and the one of traditional variables on the shape of recovery rates distributions, rather than on recovery rates themselves. Based on a wide sample of American default issues and statistical methods tailored to recovery rates data specificities, we show that economic uncertainty is the most important systematic determinant of recovery rates distributions. By contrast, default rate remains a key determinant of the dispersion of these distributions, but not for their means. Taking this evidence into account is critical for the sound implementation of stochastic recovery rates models used by financial institutions for the computation of regulatory capital.

Keywords: Recovery rate, Loss given default, Corporate bond, Credit risk, Uncertainty

JEL Classification: G21, G28, G33

Suggested Citation

Gambetti, Paolo and Gauthier, Genevieve and Vrins, Frederic Daniel, Recovery Rates: Uncertainty Certainly Matters (April 5, 2019). Available at SSRN: https://ssrn.com/abstract=3366889 or http://dx.doi.org/10.2139/ssrn.3366889

Paolo Gambetti

Louvain Finance Center (LFIN), UCLouvain ( email )

34 Voie du Roman Pays - L1.03.01
Louvain-la-Neuve, 1348
Belgium

Genevieve Gauthier

Department of decision Sciences and GERAD ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Associate member, Oxford-Man Institute (OMI) ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Frederic Daniel Vrins (Contact Author)

LFIN/LIDAM, UCLouvain ( email )

Voie du Roman Pays 34
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://www.uclouvain.be/frederic.vrins

Center for Operations Research and Econometrics (CORE), UC Louvain ( email )

Voie du Roman Pays 34
Louvain-la-Neuve,, B-1348
Belgium

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