Patterns of rational default

In this paper, we move closer to the interests of empirical research by providing the entire distribution of default’s severity, not just a summary total. The total price of a mortgage’s default option already provides a rough summary statistic of the unconditional expected severity of default, but as will be seen, distributions of severity are both disperse and skewed and so inadequately described by even their conditional means. The results make it clear that the likelihood of default and the likely magnitude of that default must be treated as separate phenomena.