Empirical Implementation of a 2-Factor Structural Model for Loss-Given-Default

In this study we develop a theoretical model for ultimate loss-given default in the Merton (1974) structural credit risk model framework, deriving compound option formulae to model differential seniority of instruments, and incorporating an optimal foreclosure threshold. We consider an extension that allows for an independent recovery rate process, representing undiversifiable recovery risk, having a stochastic drift. The comparative statics of this model are analyzed and compared and in the empirical exercise, we calibrate the models to observed LGDs on bonds and loans having both trading prices at default and at resolution of default, utilizing an extensive sample of losses on defaulted firms (Moody’s Ultimate Recovery Database™), 800 defaults in the period 1987-2008 that are largely representative of the U.S. large corporate loss experience, for which we have the complete capital structures and can track the recoveries on all instruments from the time of default to the time of resolution. We find that parameter estimates vary significantly across recovery segments, that the estimated volatilities of recovery rates and of their drifts are increasing in seniority (bank loans versus bonds). We also find that the component of total recovery volatility attributable to the LGD-side (as opposed to the PD-side) systematic factor is greater for higher ranked instruments and that more senior instruments have lower default risk, higher recovery rate return and volatility, as well as greater correlation between PD and LGD. Analyzing the implications of our model for the quantification of downturn LGD, we find the ratio of the later to ELGD (the “LGD markup”) to be declining in expected LGD, but uniformly higher for lower ranked instruments or for higher PD-LGD correlation. Finally, we validate the model in an out-of-sample bootstrap exercise, comparing it to a high-dimensional regression model and to a non-parametric benchmark based upon the same data, where we find our model to compare favorably. We conclude that our model is worthy of consideration to risk managers, as well as supervisors concerned with advanced IRB under the Basel II capital accord.LGD; credit risk; default; structural model

Empirical Analysis and Trading Strategies for Defaulted Debt Securities with Models for Risk and Investment Management

This study empirically analyzes the historical performance of defaulted debt from Moody’s Ultimate Recovery Database (1987-2010). Motivated by a stylized structural model of credit risk with systematic recovery risk, we argue and find evidence that returns on defaulted debt co-vary with determinants of the market risk premium, firm specific and structural factors. Defaulted debt returns in our sample are observed to be increasing in collateral quality or debt cushion of the issue. Returns are also increasing for issuers having superior ratings at origination, more leverage at default, higher cumulative abnormal returns on equity prior to default, or greater market implied loss severity at default. Considering systematic factors, returns on defaulted debt are positively related to equity market indices and industry default rates. On the other hand, defaulted debt returns decrease with short-term interest rates. In a rolling out-of-time and out-of-sample resampling experiment we show that our leading model exhibits superior performance. We also document the economic significance of these results through excess abnormal returns, implementing a hypothetical trading strategy, of around 5-6% (2-3%) assuming zero (1bp per month) round-trip transaction costs. These results are of practical relevance to investors and risk managers in this segment of the fixed income market.Distressed Debt; Recoveries; Default; Credit Risk

Technical characteristics of the OmniTRACS: The first operation mobile Ku-band satellite communications system

The techinical characteristics of the OmniTRACS system are described. The system is the first operational mobile Ku-band satellite communications system and provides two-way message and position determination service to mobile terminals using existing Ku-band satellites. Interference to and from the system is minimized by the use of special spread-spectrum techniques, together with low power and low data rate transmissions

A second anniversary operational review of the OmniTRACS(R): The first two-way mobile Ku-band satellite communications system

A novel two-way mobile satellite communications and vehicle position reporting system that is currently operational in the United States and Europe is described. The system characteristics and service operations are described in detail. Technical descriptions of the equipment and signal processing techniques are provided