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A Multi-Factor Approach for Systematic Default and Recovery Risk

Rösch, Daniel ; Scheule, Harald



Abstract

This article develops a simultaneous multifactor model for defaults and recoveries. Applying this model, risk parameters can be forecast using systematic and idiosyncratic risk factors and their implied correlations. The theoretical framework is accompanied by an empirical analysis in which a negative correlation between defaults and recoveries over the business cycle is observed. In the study, ...

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