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The Merton Approach to Estimating Loss Given Default: Application to the Czech Republic

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  • Jakub Seidler
  • Petr Jakubik

Abstract

This paper focuses on a key credit risk parameter – Loss Given Default (LGD). We illustrate how the LGD can be estimated with the help of an adjusted Mertonian structural approach. We present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other company structural parameters. Finally, we estimate the five-year expected LGDs for companies listed on Prague Stock Exchange and find that the average LGD for the analyzed sample is around 20–50%.

Suggested Citation

  • Jakub Seidler & Petr Jakubik, 2009. "The Merton Approach to Estimating Loss Given Default: Application to the Czech Republic," Working Papers 2009/13, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2009/13
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    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2009_13.pdf
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    References listed on IDEAS

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    Cited by:

    1. Siemsen, Thomas & Vilsmeier, Johannes, 2017. "A stress test framework for the German residential mortgage market: Methodology and application," Discussion Papers 37/2017, Deutsche Bundesbank.

    More about this item

    Keywords

    Credit risk; loss given default; structural models.;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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