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Author : Edward I. Altman
Publisher :
ISBN 13 :
Total Pages : 25 pages
Book Rating : 4.:/5 (248 download)
Download or read book Explaining Aggregate Recovery Rates on Corporate Bond Defaults written by Edward I. Altman and published by . This book was released on 2002 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Edward I. Altman
Publisher :
ISBN 13 :
Total Pages : 27 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Link between Default and Recovery Rates written by Edward I. Altman and published by . This book was released on 2008 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Author : Edward I. Altman
Publisher :
ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Link between Default and Recovery Rates written by Edward I. Altman and published by . This book was released on 2008 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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) that depend on recovery rates as a key variable.
Author : Edward I. Altman
Publisher :
ISBN 13 :
Total Pages : 37 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Link between Default and Recovery Rates written by Edward I. Altman and published by . This book was released on 2014 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses the impact of various assumptions about the association between aggregate default probabilities and the loss given default on bank loans and corporate bonds, and seeks to empirically explain this critical relationship. Moreover, it simulates the effects of this relationship on the procyclicality of mandatory capital requirements like those proposed in 2001 by the Basel Committee on Banking Supervision. We present the analysis and results in four distinct sections. The first section examines the literature of the last three decades of the various structural-form, closed-form and other credit risk and portfolio credit value-at-risk (VaR) models and the way they explicitly or implicitly treat the recovery rate variable. Section 2 presents simulation results under three different recovery rate scenarios and examines the impact of these scenarios on the resulting risk measures: our results show a significant increase in both expected an unexpected losses when recovery rates are stochastic and negatively correlated with default probabilities. In Section 3, we empirically examine the recovery rates on corporate bond defaults, over the period 1982-2000. We attempt to explain recovery rates by specifying a rather straightforward statistical least squares regression model. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities. Our econometric univariate and multivariate time series models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. Finally, in Section 4 we analyse how the link between default probability and recovery risk would affect the procyclicality effects of the New Basel Capital Accord, due to be released in 2002. We see that, if banks are let free to use their own estimates of LGD (as in the advanced IRB approach), an increase in their sensitivity to economic cycles would follow. Our results have important implications for just about all portfolio credit risk models, for markets which depend on recovery rates as a key variable (eg securitisations, credit derivatives, etc), for the current debate on the revised BIS guidelines for capital requirements on bank credit assets, and for investors in corporate bonds of all credit qualities.
Author : Ivailo Izvorski
Publisher : International Monetary Fund
ISBN 13 : 1451850603
Total Pages : 33 pages
Book Rating : 4.4/5 (518 download)
Download or read book Recovery Ratios and Survival Times for Corporate Bonds written by Ivailo Izvorski and published by International Monetary Fund. This book was released on 1997-07-01 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the determinants of the recovery ratios and survival times (time until default) for U. S. corporate bonds. We show that seniority, the type of industry in which the firm operates, and the type of restructuring attempted after default are the major determinants of the cross-sectional distribution of individual bond recovery ratios. On an industry level, physical asset obsolescence, industry growth, and industry concentration are the most important factors. We also analyze survival times for corporate bonds and find that initial time to maturity and the general economic conditions at maturity and default explain a large fraction of the cross-sectional variation of survival times.
Author : Edward I. Altman
Publisher :
ISBN 13 :
Total Pages : 46 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Link between Default and Recovery Rates written by Edward I. Altman and published by . This book was released on 2013 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the impact of various assumptions about the association between aggregate default probabilities and the loss given default on bank loans and corporate bonds, and seeks to empirically explain this critical relationship. Moreover, it simulates the effects on mandatory capital requirements like those proposed in 2001 by the Basel Committee on Banking Supervision. We present the analysis and results in four distinct sections. The first section examines the literature of the last three decades of the various structural-form, closed-form and other credit risk and portfolio credit value-at-risk (VaR) models and the way they explicitly or implicitly treat the recovery rate variable. Section 2 presents simulation results under three different recovery rate scenarios and examines the impact of these scenarios on the resulting risk measures: our results show a significant increase in both expected and unexpected losses when recovery rates are stochastic and negatively correlated with default probabilities. In Section 3, we empirically examine the recovery rates on corporate bond defaults, over the period 1982-2000. We attempt to explain recovery rates by specifying a rather straightforward statistical least squares regression model. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities. Our econometric univariate and multivariate time series models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. Finally, in Section 4 we analyze how the link between default probability and recovery risk would affect the procyclicality effects of the New Basel Capital Accord, due to be released in 2002. We see that, if banks use their own estimates of LGD (as in the quot;advancedquot; IRB approach), an increase in the sensitivity of banks' LGD due to the variation in PD over economic cycles is likely to follow. Our results have important implications for just about all portfolio credit risk models, for markets which depend on recovery rates as a key variable (e.g., securitizations, credit derivatives, etc.), for the current debate on the revised BIS guidelines for capital requirements on bank credit assets, and for investors in corporate bonds of all credit qualities.
Author : Andrea Sironi
Publisher :
ISBN 13 :
Total Pages : 44 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Link between Default and Recovery Rates written by Andrea Sironi and published by . This book was released on 2008 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the impact of various assumptions about the association between aggregate default probabilities and the loss given default on bank loans and corporate bonds, and seeks to empirically explain this critical relationship. Moreover, it simulates the effects on mandatory capital requirements like those proposed in 2001 by the Basel Committee on Banking Supervision. We present the analysis and results in four distinct sections. The first section examines the literature of the last three decades of the various structural-form, closed-form and other credit risk and portfolio credit value-at-risk (VaR) models and the way they explicitly or implicitly treat the recovery rate variable. Section 2 presents simulation results under three different recovery rate scenarios and examines the impact of these scenarios on the resulting risk measures: our results show a significant increase in both expected and unexpected losses when recovery rates are stochastic and negatively correlated with default probabilities. In Section 3, we empirically examine the recovery rates on corporate bond defaults, over the period 1982-2000. We attempt to explain recovery rates by specifying a rather straightforward statistical least squares regression model. The central thesis is that aggregate recovery rates are basically a function of supply and demand for the securities. Our econometric univariate and multivariate time series models explain a significant portion of the variance in bond recovery rates aggregated across all seniority and collateral levels. Finally, in Section 4 we analyze how the link between default probability and recovery risk would affect the procyclicality effects of the New Basel Capital Accord, due to be released in 2002. We see that, if banks use their own estimates of LGD (as in the quot;advancedquot; IRB approach), an increase in the sensitivity of banks' LGD due to the variation in PD over economic cycles is likely to follow. Our results have important implications for just about all portfolio credit risk models, for markets which depend on recovery rates as a key variable (e.g., securitizations, credit derivatives, etc.), for the current debate on the revised BIS guidelines for capital requirements on bank credit assets, and for investors in corporate bonds of all credit qualities.
Author : Rainer Jankowitsch
Publisher :
ISBN 13 :
Total Pages : 47 pages
Book Rating : 4.:/5 (13 download)
Download or read book The Determinants of Recovery Rates in the US Corporate Bond Market written by Rainer Jankowitsch and published by . This book was released on 2014 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the recovery rates of defaulted bonds in the US corporate bond market over the time period from 2002 to 2010, based on a complete set of traded prices and volumes. A detailed study of the microstructure of trading in defaulted bonds around various types of default events is provided. We document temporary price pressure with high trading volumes on the default day and the following 30 days, and low trading activity at pre-default levels thereafter. Based on these observations, market-based recovery rates in the period representing the high trading activity window are estimated. As an important additional contribution, we quantify the liquidity of defaulted bonds using various liquidity measures. We explore the relation between the recovery rates and these measures, considering additionally a comprehensive set of bond characteristics, firm fundamentals and macroeconomic variables. Our analysis explains 66% of the cross-sectional variation in recovery rates, revealing that transaction cost metrics of liquidity are particularly important variables, along with bond covenants, balance sheet ratios motivated by structural credit risk models, and macroeconomic variables. Additionally, we study the relation between price and liquidity changes in different post-default time periods.
Author : David T. Hamilton
Publisher :
ISBN 13 :
Total Pages : 60 pages
Book Rating : 4.:/5 (129 download)
Download or read book Default and Recovery Rates of Corporate Bond Issuers written by David T. Hamilton and published by . This book was released on 2001 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate bond defaults surged in 2000, and are forecast to continue through 2001. This report documents the 2000 default experience, explores its underlying causes, and discusses Moody's forecast for defaults for 2001. Briefly, Moody's finds that:- Worldwide, 110 Moody's-rated issuers defaulted on USD33.4 billion of long-term, publicly held corporate and sovereign debt in 2000. Including non-rated defaulters, 167 issuers defaulted on USD49.1 billion.- The US continues to be the largest single source of defaults, contributing 125 defaults on $29.1 billion of publicly held long-term corporate bonds in 2000.- Defaults in the telecommunications sector totaled USD6.48 billion, making it the top defaulting industrial sector by dollar volume. The Construction, Building amp; Real Estate, and Automobile sectors also experienced a disproportionately high volume of defaults in 2000.- Moody's issuer-weighted trailing 12-month spec-grade default rate ended 2000 at 5.71% (revised), up from 5.69%. On a dollar-weighted basis, the spec-grade default rate finished 2000 at 6.21%.- The 2000 all-corporate trailing 12-month default rate finished the year at 2.28%. Four issuers held investment grade ratings within one year of default, the highest number since 1989.- Average recovery rates fell again for almost all seniority/security classes in 2000. Overall, recovery rates for corporate bonds averaged 28.8% of par, down from 39.7% last year, and below their post-1970 average of 42%.- Moody's forecasts the speculative grade default rate to rise to 9.5% by the end of 2001, as negative credit trends persist and as an economic slowdown in the US could now meaningfully affect corporate failures.
Author : Dirk Herkommer
Publisher :
ISBN 13 :
Total Pages : 31 pages
Book Rating : 4.:/5 (129 download)
Download or read book Recovery Rates in Credit Default Models Theory and Application to Corporate Bonds written by Dirk Herkommer and published by . This book was released on 2008 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper I derive a reduced form credit risk model with stochastic recovery rates that is able to distinguish between default and bankruptcy and that is able to price defaulted debt consistently. First, I develop a general corporate bond pricing formula with the help of Characteristic Functions. Second, I specify the driving state variables as well as the functional form of intensities and recovery rates to derive a closed form valuation formula. In a numerical example I show how the resulting credit spreads depend on the default and bankruptcy parameters and the assumption of stochastic intensities and recovery rates. Credit spreads increase with higher default and bankruptcy intensities and decrease with higher recovery rates at default and at bankruptcy. If intensities and recovery rates are constant, the resulting term structure differs significantly. Additionally modeling the recovery rates stochastically has smaller effects.
Author : Edward I. Altman
Publisher : Bloomberg Press
ISBN 13 : 9781904339502
Total Pages : 364 pages
Book Rating : 4.3/5 (395 download)
Download or read book Recovery Risk written by Edward I. Altman and published by Bloomberg Press. This book was released on 2005-01-01 with total page 364 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this ground-breaking new title, Risk Books brings together three prominent editors to provide a timely reference text on loss given default (LGD) measurement and management and the requirements of the Basel II Capital Accord.
Author : Ivailo Izvorski
Publisher :
ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (129 download)
Download or read book Recovery Ratios and Survival Times for Corporate Bonds written by Ivailo Izvorski and published by . This book was released on 2006 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the determinants of the recovery ratios and survival times (time until default) for U. S. corporate bonds. We show that seniority, the type of industry in which the firm operates, and the type of restructuring attempted after default are the major determinants of the cross-sectional distribution of individual bond recovery ratios. On an industry level, physical asset obsolescence, industry growth, and industry concentration are the most important factors. We also analyze survival times for corporate bonds and find that initial time to maturity and the general economic conditions at maturity and default explain a large fraction of the cross-sectional variation of survival times.
Author : Jean Helwege
Publisher :
ISBN 13 :
Total Pages : 6 pages
Book Rating : 4.:/5 (129 download)
Download or read book Understanding Aggregate Default Rates of High Yield Bonds written by Jean Helwege and published by . This book was released on 2007 with total page 6 pages. Available in PDF, EPUB and Kindle. Book excerpt: What explains the wide swings in the default rate on high yield bonds in recent years? Differences in credit quality from year to year account for much of the observed variation in default rates, but economic conditions and the age of bonds have also played a role.
Download or read book Default and Recovery Rates of Corporate Bond Issuers written by and published by . This book was released on 1997 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Niklas Wagner
Publisher : CRC Press
ISBN 13 : 1584889950
Total Pages : 600 pages
Book Rating : 4.5/5 (848 download)
Download or read book Credit Risk written by Niklas Wagner and published by CRC Press. This book was released on 2008-05-28 with total page 600 pages. Available in PDF, EPUB and Kindle. Book excerpt: Featuring contributions from leading international academics and practitioners, Credit Risk: Models, Derivatives, and Management illustrates how a risk management system can be implemented through an understanding of portfolio credit risks, a set of suitable models, and the derivation of reliable empirical results. Divided into six sectio
Author : Qi Zhang
Publisher :
ISBN 13 :
Total Pages : 306 pages
Book Rating : 4.:/5 (847 download)
Download or read book Credit Risk, Fraud Risk, and Corporate Bond Spreads written by Qi Zhang and published by . This book was released on 2013 with total page 306 pages. Available in PDF, EPUB and Kindle. Book excerpt: Exploring the main factors that determine bond spreads with respect to Treasury rates is one of the most critical issues in the corporate debt market. Credit risk has long been perceived as the most important determinant of bond spreads (Fisher, 1959). One of the most critical parameters in credit risk models is asset volatility, which includes idiosyncratic and systematic components. However, these models do not distinguish between them. Chapter 2 investigates the impact of idiosyncratic volatility on bond portfolio spreads between 2000 and 2010. While the prediction of traditional asset pricing models is that firm-specific risk should be diversified away at aggregate level, I find idiosyncratic volatility plays an incremental role in explaining bond portfolio spreads beyond the market factors. Recovery is an important measurement of credit risk additional to default probability. Chapter 3 focuses on the estimation of firm recovery after bankruptcy using the Leland and Toft (1996) model. Using a large sample of Chapter 11 filings from 1996 to 2007, I find that the recovery derived from the Leland and Toft model has strong explanatory power on the debt recovery observed in the market. Recent literature finds that all extant credit risk models significantly underestimate bond spreads, especially for investment grade bonds of short maturity. Chapter 4 identifies a heretofore ignored component, perceived accounting misstatement, by regressing bond spreads on the proxy of accounting misstatement propensity, while controlling for issuers' default risk and bond illiquidity risk between January 1994 and June 2002. My thesis deepens the understanding of bond price discovery mechanisms and presents an important challenge for future research to incorporate the strong empirical relationship between idiosyncratic volatility and bond yields in asset pricing models. My thesis also sheds light on the accurate prediction of debt recovery, which is important to the valuation and hedging of risky debt and credit derivatives. Furthermore, my thesis assists in solving the credit spread puzzle by identifying a new risk factor. Overall, my thesis provides new insights into research on the corporate debt market and has important implications for academic scholars and market practitioners.
Author : Marti Subrahmanyam
Publisher : Now Publishers
ISBN 13 : 9781601989000
Total Pages : 150 pages
Book Rating : 4.9/5 (89 download)
Download or read book Credit Default Swaps written by Marti Subrahmanyam and published by Now Publishers. This book was released on 2014-12-19 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.
