FIN-03-006 |
NYU Stern School of Business |
March 2003
Edward I. Altman, Brooks Brady, Andrea Resti and Andrea Sironi
ABSTRACT
This paper analyzes the association between aggregate 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 all seniority and collateral levels. The central thesis is that aggregate
recovery rates are basically a function of supply and demand for the securities, with default
rates playing a pivotal role. Such a link would bring about a significant increase in both
expected and unexpected losses as measured by some widespread credit risk models, and would
affect the procyclicality effects of the New Basel Capital Accord. Our results have also important
implications for investors in corporate bonds and bank loans, and for all markets (e.g.,
securitizations, credit derivatives, etc.) which depend on recovery rates as a key variable.
Classification: G15, G21, G28
Edward I. Altman
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0709
Email: ealtman@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~ealtman
Brooks Brady
Institution: Associate Director, Standard & Poor’s Risk Solutions Group.
Andrea Resti
Institution: Associate Professor of Finance, Department of Mathematics and Statistics, Bergamo University, Italy
Andrea Sironi
Institution: Professor of Financial Markets and Institutions and Director of the Research Division of SDA Business School, Bocconi
University, Milan, Italy
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