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A volatility-based single parameter Loss Given Default model

Author

Listed:
  • Yang, Hank Z.

Abstract

This paper proposes an alternative recovery model (ie Loss Given Default (LGD) Mapping Function) that links LGD to default rate through a single asset volatility parameter. The model is closed-form and easy to calibrate. It may be applied to wholesale credit risk management, such as LGD forecasting, stress testing and integration into the Basel advanced internal rating-based (AIRB) framework. The model may also potentially be applied to market risk management, such as derivation of market-based LGD for the purpose of regulatory credit valuation adjustment (CVA) under Basel advanced CVA capital framework.

Suggested Citation

  • Yang, Hank Z., 2015. "A volatility-based single parameter Loss Given Default model," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 8(2), pages 196-210, March.
    • Handle: RePEc:aza:rmfi00:y:2015:v:8:i:2:p:196-210
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    More about this item

    Keywords

    Basel; CVA; default; LGD; volatility; CDS;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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