The Merton Approach to Estimating Loss Given Default: Application to the Czech Republic
AbstractThis paper focuses on a key credit risk parameter â€“ 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 20â€“50%.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2009/13.
Date of creation: Dec 2009
Date of revision:
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Credit risk; loss given default; structural models.;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-10 (All new papers)
- NEP-RMG-2010-07-10 (Risk Management)
- NEP-TRA-2010-07-10 (Transition Economics)
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