Asset correlation can be defined generally. However, I am thinking about asset correlation in the sense of single-risk factor model (also typically known as default correlation or IRBA correlation coefficient), as also used in the Basel's Internal Rating Based Formula (R). In the CRR, corporates have (possible range) asset correlation of 8%-24% and retails 3%-16%. Empirical evidence shows low asset correlation for bonds; and there is a positive relationship between default rate and asset correlation. Loosely, one could use asset correlation as an alternative for risk-measurement. High value would mean that the asset has a high systematic risk.
So, what do I mean by "convex" or "non-convex"?
For an Asset A, let p(A) be its asset correlation.
Given two assets A and B, and p(A)
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