Credit Expected Shortfall with Time Varying Recovery Risk
28 Pages Posted: 29 Oct 2015
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: 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
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