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Estimating expected loss given default in an emerging market: the case of Czech Republic

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Author Info

  • Seidler, Jakub

    ()
    (Czech National Bank)

  • Horvath, Roman

    ()
    (Czech National Bank)

  • Jakubík, Petr

    ()
    (Czech National Bank)

Abstract

This article discusses the estimation of a key credit risk parameter – loss given default (LGD) – and calculates it for selected companies traded on the Prague Stock Exchange. The importance of estimating LGD stems from the fact that a lender‟s expected loss is the product of the probability of default, the credit exposure at the time of default, and the LGD. The Mertonian structural approach is used for LGD estimation. This technique makes it possible to derive LGD for publicly traded companies based on their debt and share prices. Our results indicate that the LGD has increased substantially during the current financial crisis, but not exceeding the levels reached over a decade ago, when the Czech Republic experienced rather unfavorable economic conditions. Next, we put forward that our resulting LGD calculated for main companies traded on the Prague Stock Exchange represents a lower estimate of this parameter for the entire corporate sector. This suggests that credit risk management strategies for the corporate sector should be more conservative than what our estimates imply.

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Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 27 (2009)
Issue (Month): ()
Pages: 103-107

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Handle: RePEc:ris:jofitr:1390

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Keywords: Credit risk; loss given default; Prague Stock Exchange;

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References

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  1. Brian L. Betker, 1997. "The Administrative Costs of Debt Restructurings: Some Recent Evidence," Financial Management, Financial Management Association, vol. 26(4), Winter.
  2. Dvorak, Tomas & Podpiera, Richard, 2005. "European Union enlargement and equity markets in accession countries," Working Paper Series 0552, European Central Bank.
  3. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
  4. Egert, Balazs & Kocenda, Evzen, 2007. "Interdependence between Eastern and Western European stock markets: Evidence from intraday data," Economic Systems, Elsevier, vol. 31(2), pages 184-203, June.
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Cited by:
  1. Katerina Arnostova & Jozef Barunik & Jan Filacek & Michal Franta & David Havrlant & Roman Horvath & Filip Novotny & Marie Rakova & Lubos Ruzicka & Branislav Saxa & Katerina Smidkova & Peter Toth, 2012. "Macroeconomic Forecasting: Methods, Accuracy and Coordination," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 10, number rb10/1 edited by Jan Babecky.
  2. Jan Babecky & Alena Bicakova & Alexis Derviz & Tomas Havranek & Roman Horvath & Lubos Komarek & Zlatuse Komarkova & Jakub Mateju & Ke Pang & Renata Pasalicova & Zuzana Prelcova & Marie Rakova & Pierre, 2011. "Macro-Financial Linkages: Theory and Applications," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 9, number rb09/2 edited by Jan Babecky.
  3. Jiri Witzany, 2013. "Estimating Default and Recovery Rate Correlations," Working Papers IES 2013/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2013.
  4. Jan Babecky & Philip Du Caju & Kamil Dybczak & Kamil Galuscak & Mary Keeney & Theodora Kosma & Martina Lawless & Julian Messina & Daphne Nicolitsas & Tairi Room & Frank Smets & Pawel Strzelecki & Mati, 2010. "CNB Economic Research Bulletin: Wage Adjustment in Europe," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 8, number rb08/2 edited by Jan Babecky & Kamil Galuscak.

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