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The Merton Approach to Estimating Loss Given Default: Application to the Czech Republic

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  • Jakub Seidler
  • Petr Jakubik

Abstract

This paper focuses on a key credit risk parameter – Loss Given Default (LGD). We illustrate how the LGD can be estimated with the help of an adjusted Mertonian structural approach. We present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other company structural parameters. Finally, we estimate the five-year expected LGDs for companies listed on Prague Stock Exchange and find that the average LGD for the analyzed sample is around 20–50%.

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File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2009_13.pdf
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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2009/13.

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Date of creation: Dec 2009
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Handle: RePEc:cnb:wpaper:2009/13

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Keywords: Credit risk; loss given default; structural models.;

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