In the context of the CreditMetrics Model, what does the term 'RR' refer to?

In the context of the CreditMetrics Model, the term 'RR' stands for Recovery Rate. This represents the proportion of a loan or investment that can be recovered in the event of default. Understanding recovery rates is crucial in credit risk modeling, as they help quantify potential losses when a borrower fails to meet their obligations.

The CreditMetrics Model utilizes these recovery rates to assess the credit risk of various portfolios over time, incorporating potential changes in credit ratings and the recovery characteristics associated with defaults. By defining RR as the recovery rate, the model can effectively measure the expected loss associated with credit exposures, which is essential for risk management practices in financial institutions.

This focus on recovery rates allows for a clearer understanding of the losses that can be expected in adverse scenarios, thereby helping banks and investment firms to better manage their credit risk.