Large Correlation Structures in Pools of Defaults: A Large Deviations Analysis

19 Pages Posted: 17 Jun 2009 Last revised: 22 Jun 2009

See all articles by Richard Sowers

Richard Sowers

University of Illinois at Urbana-Champaign - Department of Mathematics

Date Written: June 16, 2009

Abstract

Investment-grade tranches of pools of assets by design suffer losses only rarely. The rarity of the events, or equivalently, the size of the tail, depend crucially upon the correlation between the assets. We here study the asymptotics of a model for credit assets, where correlations are due to a two-stage hierarchy of randomness. We find that this gives a richer structure of possibilities than are present in a one-stage model of many idiosyncratic random variables and a small number of systemic random variables. Our calculations take advantage of the theory of large deviations.

Keywords: correlation, structured finance, large deviations

JEL Classification: C63

Suggested Citation

Sowers, Richard, Large Correlation Structures in Pools of Defaults: A Large Deviations Analysis (June 16, 2009). Available at SSRN: https://ssrn.com/abstract=1420890 or http://dx.doi.org/10.2139/ssrn.1420890

Richard Sowers (Contact Author)

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

1409 W. Green St.
Urbana, IL 61801
United States

HOME PAGE: http://www.math.uiuc.edu/~r-sowers/

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