Recovery Rates in investment-grade pools of credit assets: A large deviations analysis

Details Recovery Rates in investment-grade pools of credit assets: A large deviations analysis Recovery Rates in investment-grade pools of credit assets: A large deviations analysis

2010-06-07

arxiv.org/abs/1006.2711v2

Stochastic Processes and their Applications, Volume 121, Issue 12, 2011, pp. 2861- 2898

Economy

Quantitative Finance

Risk Management

27 Pages, 3 Figures

Scientific paper

10.1016/j.spa.2011.08.005

We consider the effect of recovery rates on a pool of credit assets. We allow the recovery rate to depend on the defaults in a general way. Using the theory of large deviations, we study the structure of losses in a pool consisting of a continuum of types. We derive the corresponding rate function and show that it has a natural interpretation as the favored way to rearrange recoveries and losses among the different types. Numerical examples are also provided.

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