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Downturn LGD: A Spot Recovery Approach

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  • Li, Hui
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    Abstract

    Basel II suggests that banks estimate downturn loss given default (DLGD) in capital requirement calculation. There have been studies that focused on the dependence of default rates and loss given defaults through economic cycles. However, the models proposed are still not satisfactory. In this paper, we propose a new model framework based on our recent work of stochastic spot recovery for Gaussian copula. We also compare our model with the previous approaches.

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    File URL: http://mpra.ub.uni-muenchen.de/20010/
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    File URL: http://mpra.ub.uni-muenchen.de/20375/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20010.

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    Date of creation: 13 Jan 2010
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    Handle: RePEc:pra:mprapa:20010

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    Keywords: Basel II; Downturn Loss Given Default; Stochastic Recovery; Spot Recovery; Factor Credit Models; Default Time Copula; Gaussian Copula; Large Homogeneous Pool; Credit VaR; Expected Shortfall;

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    1. Li, Hui, 2009. "On Models of Stochastic Recovery for Base Correlation," MPRA Paper 15750, University Library of Munich, Germany.
    2. Düllmann, Klaus & Trapp, Monika, 2004. "Systematic Risk in Recovery Rates: An Empirical Analysis of US Corporate Credit Exposures," Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank, Research Centre 2004,02, Deutsche Bundesbank, Research Centre.
    3. Li, Hui, 2009. "Extension of Spot Recovery Model for Gaussian Copula," MPRA Paper 17944, University Library of Munich, Germany.
    4. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.
    5. Dirk Tasche, 2004. "The single risk factor approach to capital charges in case of correlated loss given default rates," Papers cond-mat/0402390, arXiv.org, revised Feb 2004.
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