Recovery Risk

From Open Risk Manual


Recovery Risk denotes the risk that following a Default Event, contracts of the defaulting entity cannot be honoured in full, thereby leading to financial loss to the lender or other counterparty. Recovery risk is synonymous to Loss Given Default

Issues and Challenges

  • Large corporates and sovereigns are diversified entities with sufficient financial means, this imply that default events are actually fairly rare. This paucity of data makes the prediction of possible recoveries in case of default rather challenging. This is denoted as the Low Default Portfolios problem

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