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

Konstantinos Spiliopoulos, Richard B. Sowers

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)2861-2898
Number of pages38
JournalStochastic Processes and their Applications
Volume121
Issue number12
DOIs
StatePublished - Dec 2011

Keywords

  • Credit assets
  • Default rates
  • Large deviations
  • Recovery rates

ASJC Scopus subject areas

  • Statistics and Probability
  • Modeling and Simulation
  • Applied Mathematics

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