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On the accuracy of loss-given-default prediction intervals

Author

Listed:
  • J. Samuel Baixauli
  • Susana Alvarez

Abstract

Purpose - The purpose of this paper is to critically analyze the common assumption, made by many credit risk models such as the Moody's KMV Loss-Calc model, of a Design/methodology/approach - Simulation experiments were conducted to highlight the potential problems associated with this distributional assumption in constructing prediction intervals for LGD. Findings - The simulation experiments show that, when starting from a different assumption concerning the shape of the population distribution, the beta distribution does not perform well in constructing prediction intervals for LGD. Originality/value - The analysis performed in this study addresses a relevant subject. Indeed, a correct estimate of a credit exposure LGD is particularly relevant not only for internal risk management and management purposes, but also for regulatory reasons within the context of the internal ratings based approach of the recently approved capital regulation framework (Basel II).

Suggested Citation

  • J. Samuel Baixauli & Susana Alvarez, 2009. "On the accuracy of loss-given-default prediction intervals," Journal of Risk Finance, Emerald Group Publishing, vol. 10(2), pages 131-141, February.
  • Handle: RePEc:eme:jrfpps:v:10:y:2009:i:2:p:131-141
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