You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:


Log in to your personal account or through your institution.

The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications

Edward I. Altman, Brooks Brady, Andrea Resti and Andrea Sironi
The Journal of Business
Vol. 78, No. 6 (November 2005), pp. 2203-2228
DOI: 10.1086/497044
Stable URL:
Page Count: 26
Subjects: Business Finance
Find more content in these subjects: Business Finance
  • Download PDF
  • Add to My Lists
  • Cite this Item
We're having trouble loading this content. Download PDF instead.


This paper analyzes the association between default and recovery rates on credit assets and seeks to empirically explain this critical relationship. We examine recovery rates on corporate bond defaults over the period 1982–2002. Our econometric univariate and multivariate models explain a significant portion of the variance in bond recovery rates aggregated across seniority and collateral levels. We find that recovery rates are a function of supply and demand for the securities, with default rates playing a pivotal role. Our results have important implications for credit risk models and for the procyclicality effects of the New Basel Capital Accord.

Notes and References

This item contains 33 references.

  • ['Altman, Edward I. 1989. Measuring corporate bond mortality and performance. Journal of Finance 44:909–22.']
  • ['———. 1991. Distressed securities. Burr Ridge, IL: Irwin Publishing; reprinted by Beard Books, Frederick, MD 1999.']
  • ['Altman Edward I., and Pablo Arman. 2002. Defaults and returns in the high yield bond market: Analysis through 2001. Working paper, Salomon Center, New York University.']
  • ['Altman, Edward I., and Shubin Jha. 2003. Market size and investment performance of defaulted bonds and bank loans: 1987–2002. Working paper, Salomon Center, New York University.']
  • ['Altman, Edward I., and Vellore M. Kishore. 1996. Almost everything you wanted to know about recoveries on defaulted bonds. Financial Analysts Journal (November–December).']
  • ["Altman, Edward I., Andrea Resti, and Andrea Sironi. 2001. Analyzing and explaining default recovery rates. A report submitted to International Swaps and Derivatives Dealers' Association, London."]
  • ['Bakshi, G., Dilip Madan, Frank Zhang. 2001. Understanding the role of recovery in default risk models: Empirical comparisons and implied recovery rates. Finance and Economics Discussion Series, 2001–37. Washington, DC: Federal Reserve Board of Governors.']
  • ['Basel Committee on Banking Supervision. 1999. Credit risk modeling: Current practices and applications. Basel: Bank for International Settlements.']
  • ['———. 2001. The Basel capital accord. Consultative paper, Bank for International Settlements, Basel.']
  • ['Cambridge Associates, LLC. 2001. U.S. distressed company investing. Cambridge, MA; Cambridge Associates.']
  • ['Chacko, Varki, and Thomas Mercier. 2001. A model for forecasting high yield defaults. Global Research Strategy, Goldman Sachs International.']
  • ['Credit Suisse Financial Products. 1997. CreditRisk+. A credit risk management framework. Technical document, Credit Suisse Financial Products.']
  • ['Finger, Christopher. 1999. Conditional approaches for CreditMetrics® portfolio distributions.CreditMetrics®Monitor (April).']
  • ['Finger, Christopher C., Greg M. Gupton, and Mickey Bhatia. 1997. CreditMetrics. Technical document, J. P.Morgan, New York.']
  • ['FITCH. 1997. Syndicated bank loan recovery study (R. Grossman, M. Brennan, and J. Vento). FITCH, New York, NY October 22.']
  • ["———. 2001. Bank loan and bond recovery study: 1997–2001 (S. O'Shea, S. Bonelli, and R. Grossman). FITCH, New York, NY March 19."]
  • ['Fridson, Martin, Christopher Garman, and Chen Wu. 1997. Real interest rates and default rates on high yield bonds. Journal of Fixed Income (September).']
  • ['Frye, John. 2000a. Collateral damage. Risk (April): 91–94.']
  • ['———. 2000b. Collateral damage detected. Working paper, Emerging Issues Series, Federal Reserve Bank of Chicago, (October).']
  • ['———. 2000c. Depressing recoveries”, Risk (November).']
  • ['Gordy, Michael B. 2000. Credit VaR models and risk‐bucket capital rules: A reconciliation. Working Paper, Federal Reserve Board (March).']
  • ["Gupton, Greg M., David T. Hamilton, and Alexandra Berthault. 2001. Default and recovery rates of corporate bond issuers: 2000. Moody's Investors Service, New York."]
  • ["Hamilton David et al. 2003. Default and recovery rates of corporate bond issuers: A statistical review of Moody's ratings performance, 1920–2002. Moody's Investors Service, New York."]
  • ['Helwege, Jean, and Paul Kleiman. 1997. Understanding aggregate default rates of high yield bonds. Journal of Fixed Income (June).']
  • ['Hu, Yen‐Ting, and William Perraudin. 2002. The dependence of recovery rates and defaults. Mimeo, BirkBeck College.']
  • ['Jarrow, Robert A. 2001. Default parameter estimation using market prices. Financial Analysts Journal 57, no. 5:75–92.']
  • ['Jokivuolle, Esa, and Samu Peura. 2003. Incorporating collateral value uncertainty in loss given default estimates and loan‐to‐value ratios. European Financial Management 9 (September): 299–314.']
  • ['Jonsson, Jon G., and Martin S. Fridson. 1996. Forecasting default rates on high yield bonds. Journal of Fixed Income (June).']
  • ["Keenan, Sean, Jorge Sobehart, and David T. Hamilton. 1999. Predicting default rates: A forecasting model for Moody's issuer‐based default rates. Moody's Global Credit Research, Moody's Investor Services, New York."]
  • ['Resti, Andrea. 2002. The new Basel capital accord: Structure, possible changes, micro‐and macroeconomic effects. Brussels: Centre for European Policy Studies.']
  • ["Standard & Poor's. 2000. Recoveries on Defaulted Bonds Tied to Seniority Ratings (L. Brand and R. Behar). CreditWeek (February)."]
  • ['Unal, Haluk; Dilip Madan, and Levant Güntay. 2003. Pricing the risk of recovery in default with absolute priority rule violation. Journal of Banking & Finance 27 (June): 1001–25.']
  • ["Van de Castle, Karen, and David Keisman. 2000. Suddenly structure mattered: Insights into recoveries of defaulted loans. Standard & Poor's Corporate Ratings (May 24)."]