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A Framework for LGD Validation of Retail Portfolios

Author

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  • Stefan Hlawatsch

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

Modeling and estimating the loss given default (LGD) is necessary for banks which apply for the Internal-Ratings Based Approach for retail portfolios. To validate LGD estimations there are only very few approaches discussed in the literature. In this paper, two models for validating relative LGDs and absolute losses are developed. The validation of relative LGDs is important for risk-adjusted credit pricing and interest rate calculations. The validation of absolute losses is important to meet the capital requirements of Basel II. Both models are tested with real data of a bank. Estimations are tested for robustness with in-sample and out-of-sample tests.

Suggested Citation

  • Stefan Hlawatsch, 2009. "A Framework for LGD Validation of Retail Portfolios," FEMM Working Papers 09025, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  • Handle: RePEc:mag:wpaper:09025
    as

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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2009_Dateien/2009_25.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
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    2. Madan, Dilip & Unal, Haluk, 2000. "A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(1), pages 43-65, March.
    3. Jun Pan & Kenneth J. Singleton, 2008. "Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads," Journal of Finance, American Finance Association, vol. 63(5), pages 2345-2384, October.
    4. Engelmann, Bernd & Hayden, Evelyn & Tasche, Dirk, 2003. "Measuring the Discriminative Power of Rating Systems," Discussion Paper Series 2: Banking and Financial Studies 2003,01, Deutsche Bundesbank.
    5. Greg M. Gupton, 2005. "Advancing Loss Given Default Prediction Models: How the Quiet Have Quickened," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(2), pages 185-230, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Loss Given Default; Validation; Retail Portfolio;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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