On the Dependence Between Default Risk and Recovery Rates in Structural Models

47 Pages Posted: 10 Oct 2020

Date Written: August 18, 2020

Abstract

We define several concepts of dependence between default risk and recovery risk, in a factor model framework. These concepts are illustrated and compared from the perspective of structural models: Merton (1974)’s single horizon and single firm model, multi-factor extensions, possibly under a portfolio approach. Some first-passage time models are discussed too: Kou’s (2002) model and some of its extensions, in particular by adding self-exciting features. We evaluate the different concepts of “default/recovery” dependencies analytically when it is possible, otherwise by simulation.

Keywords: default probabilities, recovery rates, dependence

JEL Classification: G11, G12, G17

Suggested Citation

Fermanian, Jean-David, On the Dependence Between Default Risk and Recovery Rates in Structural Models (August 18, 2020). Available at SSRN: https://ssrn.com/abstract=3678549 or http://dx.doi.org/10.2139/ssrn.3678549

Jean-David Fermanian (Contact Author)

Ensae-Crest ( email )

92245 Malakoff Cedex
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+33141176538 (Phone)
141176538 (Fax)

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