Forecasting bank loans loss-given-default
AbstractWith the advent of the new Basel Capital Accord, banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach. In order to be compliant with this approach, institutions must estimate the expected loss-given-default, the fraction of the credit exposure that is lost if the borrower defaults. This study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses. The out-of-sample predictive ability of these models is evaluated at several recovery horizons after the default event. The out-of-time predictive ability is also estimated for a recovery horizon of one year. The performance of the models is benchmarked against recovery estimates given by historical averages. The results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss-given-default.
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Bibliographic InfoPaper provided by Centre for Applied Mathematics and Economics (CEMAPRE), School of Economics and Management (ISEG), Technical University of Lisbon in its series CEMAPRE Working Papers with number 0901.
Length: 16 pages
Date of creation: May 2009
Date of revision:
Loss-given-default; Forecasting; Bank loans; Fractional response regression; Regression trees;
Other versions of this item:
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-16 (All new papers)
- NEP-BAN-2009-05-16 (Banking)
- NEP-BEC-2009-05-16 (Business Economics)
- NEP-FMK-2009-05-16 (Financial Markets)
- NEP-FOR-2009-05-16 (Forecasting)
- NEP-RMG-2009-05-16 (Risk Management)
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