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Estimating Expected Loss Given Default

In: CNB Financial Stability Report 2008/2009

Author

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  • Petr Jakubik
  • Jakub Seidler

Abstract

This article discusses the estimation of a key credit risk parameter – loss given default (LGD) – and calculates it for selected companies traded on the Prague Stock Exchange. The importance of estimating LGD stems from the fact that a lender’s expected loss is the product of the probability of default, the credit exposure at the time of default and the LGD. The Mertonian structural approach is used for LGD estimation. This technique enables us to derive LGD for publicly traded companies from a knowledge of their debt and share prices. It is reasonable to assume that the resulting LGD calculated for selected companies traded on the Prague Stock Exchange represents a lower estimate of this parameter for the entire corporate sector.

Suggested Citation

  • Petr Jakubik & Jakub Seidler, 2009. "Estimating Expected Loss Given Default," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2008/2009, chapter 0, pages 102-109 Czech National Bank, Research Department.
  • Handle: RePEc:cnb:ocpubc:fsr0809/4
    as

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    File URL: http://www.cnb.cz/en/financial_stability/fs_reports/fsr_2008-2009/FSR_2008-2009_article_4.pdf
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    File URL: http://www.cnb.cz/en/financial_stability/fs_research/#thema
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    References listed on IDEAS

    as
    1. Jakub Seidler & Petr Jakubík, 2009. "Implied Market Loss Given Default in the Czech Republic: Structural-Model Approach," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(1), pages 20-40, January.
    2. Gregor Andrade & Steven N. Kaplan, 1998. "How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," Journal of Finance, American Finance Association, vol. 53(5), pages 1443-1493, October.
    3. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-625, July.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2013. "Dynamic Stress Testing: The Framework for Assessing the Resilience of the Banking Sector Used by the Czech National Bank," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 505-536, December.
    2. Adam Gersl & Jakub Seidler, 2010. "Conservative Stress Testing: The Role of Regular Verification," Working Papers IES 2010/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2008.
    3. Adam Gersl & Petr Jakubik & Tomas Konecny & Jakub Seidler, 2012. "Dynamic Stress Testing: The Framework for Testing Banking Sector Resilience Used by the Czech National Bank," Working Papers 2012/11, Czech National Bank, Research Department.

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