A False Sense of Security
by Jon Frye of the Federal Reserve Bank of Chicago
Abstract: Credit portfolio models often assume that recovery rates are independent of default probabilities. Here, Jon Frye presents empirical evidence showing that such assumptions are wrong. Using US historical default data, he shows that not only are recovery rates sensitive to the economic cycle, but also that they vary more for senior debt than for junior debt categories.
Published in: RISK, Vol. 16, No. 8, (August 2003), pp. 63-67.
This paper is republished as Ch.10 in...