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On the Dependence between Default Risk and Recovery Rates in Structural Models

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  • Jean-David Fermanian

Abstract

We define several concepts of dependence between default risk and recovery risk, in a factor model framework. These concepts are illustrated and compared from the perspective of structural models: Merton (1974)‘s single horizon and single firm model, multi-factor extensions, possibly under a portfolio approach. Some first-passage time models are discussed too: Kou (2002)‘s model and some of its extensions, in particular by adding self-exciting features. We evaluate the different concepts of default/recovery dependencies analytically when it is possible, otherwise by simulation.

Suggested Citation

  • Jean-David Fermanian, 2020. "On the Dependence between Default Risk and Recovery Rates in Structural Models," Annals of Economics and Statistics, GENES, issue 140, pages 45-82.
    • Handle: RePEc:adr:anecst:y:2020:i:140:p:45-82
    DOI: 10.15609/annaeconstat2009.140.0045
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    More about this item

    Keywords

    Default Probability; Recovery Rate; Copulas; Structural Models; Jumps.;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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