Recovery Rates in Investment-Grade Pools of Credit Assets: A Large Deviations Analysis

27 Pages Posted: 9 Jun 2010

See all articles by Konstantinos Spiliopoulos

Konstantinos Spiliopoulos

Brown University - Division of Applied Mathematics

Richard Sowers

University of Illinois at Urbana-Champaign - Department of Mathematics

Date Written: June 7, 2010

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.

Keywords: Recovery rates, large deviations

JEL Classification: C63

Suggested Citation

Spiliopoulos, Konstantinos and Sowers, Richard, Recovery Rates in Investment-Grade Pools of Credit Assets: A Large Deviations Analysis (June 7, 2010). Available at SSRN: https://ssrn.com/abstract=1622031 or http://dx.doi.org/10.2139/ssrn.1622031

Konstantinos Spiliopoulos

Brown University - Division of Applied Mathematics ( email )

Providence, RI 02912
United States

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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