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 language | English (US) |
|---|---|
| Pages (from-to) | 2861-2898 |
| Number of pages | 38 |
| Journal | Stochastic Processes and their Applications |
| Volume | 121 |
| Issue number | 12 |
| DOIs | |
| State | Published - Dec 2011 |
Keywords
- Credit assets
- Default rates
- Large deviations
- Recovery rates
ASJC Scopus subject areas
- Statistics and Probability
- Modeling and Simulation
- Applied Mathematics