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Extreme Correlation of Defaults and LGDs

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  • Yen-Ting Hu

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

This paper conducts a systematic investigation into the correlation between the default rate and three definitions of the recovery rate: price recoveries, settlement recoveries and discounted settlement recoveries. The data suggests a strong linear correlation for price recoveries and a weak one for settlement recoveries, but little or no correlation for discounted settlement recoveries. Using extreme value techniques, I show that the tail dependency for the settlement recoveries is as strong as that for the price recoveries. The probability of high losses (loss given default exceeding 0.9) is consistently higher for the settlement recoveries than for the price recoveries at any level of the quarterly default rate above 0.1%.

Suggested Citation

  • Yen-Ting Hu, 2007. "Extreme Correlation of Defaults and LGDs," Birkbeck Working Papers in Economics and Finance 0705, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:0705
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    File URL: https://eprints.bbk.ac.uk/id/eprint/26907
    File Function: First version, 2007
    Download Restriction: no
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    Cited by:

    1. Tilly Stephanie, 2010. "Das Zulieferproblem aus institutionenökonomischer Sicht. Die westdeutsche Automobil-Zulieferindustrie zwischen Produktionsund Marktorientierung (1960-1980)," Jahrbuch für Wirtschaftsgeschichte / Economic History Yearbook, De Gruyter, vol. 51(1), pages 137-160, June.
    2. Barbagli, Matteo & Vrins, Frédéric, 2023. "Accounting for PD-LGD dependency: A tractable extension to the Basel ASRF framework," Economic Modelling, Elsevier, vol. 125(C).

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