Credit Expected Shortfall with Time Varying Recovery Risk

28 Pages Posted: 29 Oct 2015

See all articles by Roberto Savona

Roberto Savona

University of Brescia - Department of Economics and Management

Mattia Raudaschl

Prometeia

Date Written: October 28, 2015

Abstract

In this paper we develop a flexible and analytically tractable framework to compute the Credit Expected Shortfall in an explit if form through Kumaraswamy (1980) distribution with both default rate and recovery rate time-varying. The default rate is assumed to follow a square root process, and the recovery rate is modelled based on a Jacobi diffusion. Our result is valid if default time and recovery rate are independent.

Keywords: default rate; recovery rate; Jacobi process; Expected Shortfall; Kumaraswamy distribution

JEL Classification: C22; G17; G21; G33

Suggested Citation

Savona, Roberto and Raudaschl, Mattia, Credit Expected Shortfall with Time Varying Recovery Risk (October 28, 2015). Available at SSRN: https://ssrn.com/abstract=2682398 or http://dx.doi.org/10.2139/ssrn.2682398

Roberto Savona (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Mattia Raudaschl

Prometeia ( email )

Italy

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