Advanced Search
MyIDEAS: Login

Default and loss given default in agriculture

Contents:

Author Info

  • Glenn Pederson
  • Nicholas Sakaimbo
Registered author(s):

    Abstract

    Purpose – The purpose of this paper is to investigate the relationship between loan default and loss given default (LGD) in an agricultural loan portfolio. The analysis employs a simulation model approach to evaluate the role that systematic and non-systematic risks play in determining the economic capital requirements under different agricultural economic conditions. Design/methodology/approach – The authors employ the theoretical approach suggested by Miu and Ozdemir to assess the role of LGD in the banking industry. A Monte Carlo simulation model is developed using Excel and calibrated to an agricultural credit association using historical data. The simulation model is used to evaluate the mark-up to economic capital that is implied by increasing credit risks due to cyclical changes in farm real estate values. Findings – The paper demonstrates that historical systematic risks due to the correlation between probability of default (PD) and LGD through the business cycle can result in a significant mark-up in the economic capital required by an agricultural lender. Using historical land price changes as the driver of systematic risk, the authors show that the correlations between changing PD and land values and between the PD and LGD provide evidence of how sensitive credit risk exposure is to these parameters. Originality/value – This paper is the first application of the Miu and Ozdemir model of systematic risk to an agricultural lending institution. The model approach can be adapted by farm lenders to evaluate their changing economic capital requirements through an economic cycle in agriculture.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.emeraldinsight.com/journals.htm?issn=0002-1466&volume=71&issue=2&articleid=1943263&show=abstract
    Download Restriction: Cannot be freely downloaded

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

    Volume (Year): 71 (2011)
    Issue (Month): 2 (July)
    Pages: 148-161

    as in new window
    Handle: RePEc:eme:afrpps:v:71:y:2011:i:2:p:148-161

    Contact details of provider:
    Web page: http://www.emeraldinsight.com

    Order Information:
    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
    Email:
    Web: http://www.emeraldinsight.com/afr.htm

    Related research

    Keywords: Agriculture; Business cycles; Credit; Default; Loss; Simulation; Systematic risk;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eme:afrpps:v:71:y:2011:i:2:p:148-161. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.