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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: http://www.jstor.org/stable/10.1086/497044
Page Count: 26
Subjects: Business Finance
Find more content in these subjects: Business Finance
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Abstract

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.

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