The link between default and recovery rates a global study

Abstract

A pplying the same methods and definitions as in Altman, Resti and Sironi (2005) t his thesis seeks to empirically explain the relationship between default and recovery rates in the global corporate bond market . Findings in this thesis show that global default rates explain as much as 80 percent of the annual variatio n in associated recovery rates when results are based on the same time frame (1982 - 2001) as in Altman, Resti and Sironi (2005), and around 66 percent when most recent observations (1982 - 2012) are included to the analysis. This thesis supports the findings in Altman, Resti and Sironi (2005) of a significant and negative link between default and recovery rates. Findings of a negative relationship between default and recovery rates have important implications for credit - risk - related models treating the recover y rate independent of the default rate , or probability of de fault. This thesis also analyzes the univariate and multivariate relationship between recovery rates and other market and macro based variables. Results from these tests shows that the bond defaul t rate, in comparison to these variables, undoubtedly explains the highest degree of variation in recovery rates. On a univariate basis the supply of defaulted securities significantly explains from 20 to 60 percent of the variation in recovery rates, howe ver, when added to the mu ltivariate models, results are divergent and the supply of defaulted bonds show no significant explanatory contribution. The latter results differ from the central thesis in Altman, Resti and Sironi (2005), where the multivariate r egression models assign a key role to the supply of defaulted bonds.