Modelling Downturn Loss Given Default
AbstractBasel II requires that the internal estimates of Loss Given Default (LGD) reflect economic downturn conditions, thus modelling the "downturn LGD". In this work we suggest a methodology to estimate the downturn LGD distribution. Under the assumption that LGD is a mixture of an expansion and a recession distribution, an accurate parametric model for LGD is proposed and its parameters are estimated by the EM algorithm. Finally, we apply the proposed model to empirical data on Italian bank loans.
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Bibliographic InfoPaper provided by Geary Institute, University College Dublin in its series Working Papers with number 201226.
Length: 13 pages
Date of creation: 23 Nov 2012
Date of revision:
Downturn LGD; Mixed random variable; Mixture; Beta density;
Find related papers by JEL classification:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
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