Recovery Rates in Investment-Grade Pools of Credit Assets: A Large Deviations Analysis
27 Pages Posted: 9 Jun 2010
Date Written: June 7, 2010
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, large deviations
JEL Classification: C63
Suggested Citation: Suggested Citation