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Dependence of Default Probability and Recovery Rate in Structural Credit Risk Models: Case of Greek Banks

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  • Abdelkader Derbali

    (University of Sousse)

  • Lamia Jamel

    (Sousse University)

Abstract

The main idea of this paper is to examine the dependence between the probability of default (PD) and the recovery rate (RR). For the empirical methodology, we use the bootstrapped quantile regression and the simultaneous quantile regression for a sample of 17 Greek banks listed in Athens Exchange over the period of study from January 02, 2006 to December 31, 2012. The measurement of this dependence is determined by using seven indicators such as the probability of default, the recovery rate, the number of defaults, the expected value of losses, the growth rate of GDP in Greece, and three dummy variables (the exit of another firm of the Athens Exchange, the new firm is listed in the Athens Exchange, and the date of the failure of Greece). The main empirical results show that the probability of default and the recovery rate are inversely related. Based on this result, the banks are obliged to maximize their recovery rate to reduce their probability of default.

Suggested Citation

  • Abdelkader Derbali & Lamia Jamel, 2019. "Dependence of Default Probability and Recovery Rate in Structural Credit Risk Models: Case of Greek Banks," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(2), pages 711-733, June.
    • Handle: RePEc:spr:jknowl:v:10:y:2019:i:2:d:10.1007_s13132-017-0473-1
    DOI: 10.1007/s13132-017-0473-1
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    More about this item

    Keywords

    Probability of default; Recovery rate; Number of default; Expected value of losses; Bootstrapped quantile regression; Simultaneous quantile regression;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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