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

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.

27 Pages, 3 Figures

References in corpus (1)

• Sample-path Large Deviations in Credit Risk

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