A Note on Forecasting Aggregate Recovery Rates with Macroeconomic Variables

by Stefan Trück of the Universität Karlsruhe,
Stefan Harpaintner of the Universität Karlsruhe, and
Svetlozar T. Rachev of the Universität Karlsruhe & the University of California, Santa Barbara

March 4, 2005

Abstract: We provide an ex-ante forecasting model for aggregate recovery rates. Summarizing the literature on recovery rates, there is a variety of factors considered to have influence on recovery rates of loans and bonds. In empirical works there has been strong evidence that recoveries in recessions are much lower than during phases of economic expansion. Following Altman et al. we include the business cycle and macroeconomic variables in order to forecast aggregate recovery rates of the next year. As main input the model uses the CBOE market volatility index that provides very good results in ex ante forecasts in the US bond market.

Keywords: Business Cycle, Recovery Rates, Multiple Regression, CBOE Volatility Index.

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