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Wiley InterScience | ||||||||||||||
  Economic NotesVolume 33 Issue 2, Pages 183 - 208 Published Online: 21 Sep 2004 Journal compilation © Banca Monte dei Paschi di Siena SpA 2009
Abstract | References | Full Text: PDF (Size: 224K) | Related Articles | Citation Tracking  Default Recovery Rates in Credit Risk Modelling: A Review of the Literature and Empirical Evidence * Max L. Heine Professor of Finance and Director of the Credit and Debt Markets Research Program, NYU Salomon Center, Stern School of Business, New York, USA. † The author is Associate Professor of Mathematical Finance, Department of Mathematics and Statistics, Bergamo University, Italy, e-mail: andrea.resti@unibg.it ‡ The author is Professor of Financial Markets and Institutions and Director of the Research Division of the School of Management, Bocconi University, Milan, Italy. Copyright Banca Monte dei Paschi di Siena SpA, 2004 ABSTRACTEvidence from many countries in recent years suggests that collateral values and recovery rates (RRs) on corporate defaults can be volatile and, moreover, that they tend to go down just when the number of defaults goes up in economic downturns. This link between RRs and default rates has traditionally been neglected by credit risk models, as most of them focused on default risk and adopted static loss assumptions, treating the RR either as a constant parameter or as a stochastic variable independent from the probability of default (PD). This traditional focus on default analysis has been partly reversed by the recent significant increase in the number of studies dedicated to the subject of recovery‐rate estimation and the relationship between default and RRs. This paper presents a detailed review of the way credit risk models, developed during the last 30 years, treat the RR and, more specifically, its relationship with the PD of an obligor. Recent empirical evidence concerning this issue is also presented and discussed. (J.E.L.: G15, G21, G28). Received: 28 February 2002; Accepted: 09 September 2002; | 
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IT'S TIME TO RENEW
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