Recovery Rates in Investment-grade Pools of Credit Assets: A large deviations analysis
by Konstantinos Spiliopoulos of Brown University, and
August 11, 2011
Abstract: 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.
Keywords: Recovery rates, Default rates, Credit assets, Large deviations.
Published in: Stochastic Processes and their Applications, Vol. 121, No. 12, (December 2011), pp. 2861-2898.