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Loss-Given-Default Modeling by Post-Last Passage Time Process

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  • Masahiko Egami
  • Rusudan Kevkhishvili

Abstract

This study proposes a stochastic model for loss-given-default (LGD) which provides the LGD distribution based on credit market and company-specific financial conditions. The model utilizes last passage time of a linear diffusion (representing firm value) to a certain threshold point, after which default occurs as a surprising event. By treating the post-last passage time process in a continuum of the original process, we are able to use firm-value approach before and intensity-based approach after the last passage time, leading to a hybrid model. Under minimal and standard assumptions, we obtain the distributions of default time and LGD explicitly. We provide a computationally simple estimation procedure and real-world examples of estimated LGD distribution implied in CDS market.

Suggested Citation

  • Masahiko Egami & Rusudan Kevkhishvili, 2020. "Loss-Given-Default Modeling by Post-Last Passage Time Process," Papers 2009.00868, arXiv.org, revised Nov 2025.
    • Handle: RePEc:arx:papers:2009.00868
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    References listed on IDEAS

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