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Estimating Expected Loss Given Default

In: CNB Financial Stability Report 2008/2009

  • Petr Jakubik
  • Jakub Seidler

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.

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This chapter was published in: Petr Jakubik & Jakub Seidler CNB Financial Stability Report 2008/2009, , chapter Thematic Article 4, pages 102-109, 2009.
This item is provided by Czech National Bank, Research Department in its series Occasional Publications - Chapters in Edited Volumes with number fsr0809/4.
Handle: RePEc:cnb:ocpubc:fsr0809/4
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  1. 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.
  2. 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 449-70, May.
  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 611-25, July.
  4. 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.
  5. 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 637-54, May-June.
  6. 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.
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