Publication detail

Estimating Default and Recovery Rate Correlations

Author(s): RNDr. Jiří Witzany Ph.D.,
Type: IES Working Papers
Year: 2013
Number: 3
ISSN / ISBN:
Published in: IES Working Papers 3/2013
Publishing place: Prague
Keywords: credit risk, Basel II regulation, default rates, recovery rates, correlation
JEL codes: G20, G28, C51
Suggested Citation: Witzany, J. (2013). “Estimating Default and Recovery Rate Correlations” IES Working Paper 03/2013. IES FSV. Charles University.
Abstract: The paper analyzes a two-factor credit risk model allowing to capture default and recovery rate variation, their mutual correlation, and dependence on various explanatory variables. At the same time, it allows computing analytically the unexpected credit loss. We propose and empirically implement estimation of the model based on aggregate and exposure level Moody’s default and recovery data. The results confirm existence of significantly positive default and recovery rate correlation. We empirically compare the unexpected loss estimates based on the reduced two-factor model with Monte Carlo simulation results, and with the current regulatory formula outputs. The results show a very good performance of the proposed analytical formula which could feasibly replace the current regulatory formula.
Downloadable: WP_2013_03_Witzany

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