Non- and Semi-parametric Methods for Modelling Recovery Rates

Following the recent global financial crisis largely caused by loan defaults, the regulator Basel requests banks to hold high capital against credit risk exposure. The estimation of credit risk involves modelling defaulted loan recoveries, which has been found to be challenging in the literature. This thesis develops innovative nonparametric and semiparametric econometric models for loan recoveries, and demonstrates via simulation as well as empirical studies how the key determinants of the recoveries can be found. The outcomes can help banks to design treatment rules for individual borrowers, predict future recoveries of defaulted loans and estimate the accurate level of capital requirement.