Simulation and Estimation of Loss Given Default
AbstractThe aim of our paper is the development of an adequate estimation model for the loss given default, which incorporates the empirically observed bimodality and bounded nature of the distribution. Therefore we introduce an adjusted Expectation Maximization algorithm to estimate the parameters of a univariate mixture distribution, consisting of two beta distributions. Subsequently these estimations are compared with the Maximum Likelihood estimators to test the efficiency and accuracy of both algorithms. Furthermore we analyze our derived estimation model with estimation models proposed in the literature on a synthesized loan portfolio. The simulated loan portfolio consists of possibly loss-influencing parameters that are merged with loss given default observations via a quasi-random approach. Our results show that our proposed model exhibits more accurate loss given default estimators than the benchmark models for different simulated data sets comprising obligor-specific parameters with either high predictive power or low predictive power for the loss given default.
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Bibliographic InfoPaper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100010.
Length: 37 pages
Date of creation: Mar 2010
Date of revision:
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More information through EDIRC
Bimodality; EM Algorithm; Loss Given Default; Maximum Likelihood; Mixture Distribution; Portfolio Simulation;
Find related papers by JEL classification:
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-15 (All new papers)
- NEP-CMP-2010-05-15 (Computational Economics)
- NEP-ECM-2010-05-15 (Econometrics)
- NEP-RMG-2010-05-15 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joao A. Bastos, 2009.
"Forecasting bank loans loss-given-default,"
CEMAPRE Working Papers
0901, Centre for Applied Mathematics and Economics (CEMAPRE), School of Economics and Management (ISEG), Technical University of Lisbon.
- Dermine, J. & de Carvalho, C. Neto, 2006. "Bank loan losses-given-default: A case study," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1219-1243, April.
- Esa Jokivuolle & Samu Peura, 2003. "Incorporating Collateral Value Uncertainty in Loss Given Default Estimates and Loan-to-value Ratios," European Financial Management, European Financial Management Association, vol. 9(3), pages 299-314.
- Jobst, Norbert J. & Zenios, Stavros A., 2005. "On the simulation of portfolios of interest rate and credit risk sensitive securities," European Journal of Operational Research, Elsevier, vol. 161(2), pages 298-324, March.
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