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Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic

Author

Listed:
  • Konstantin Belyaev
  • Aelita Belyaeva
  • Tomas Konecny
  • Jakub Seidler
  • Martin Vojtek

Abstract

This paper focuses on key macroeconomic driving factors influencing the loss given default (LGD) - an important credit risk parameter determining credit losses of the banking sector. Various econometric approaches are applied on both individual and aggregated data for different bank segments in order to identify the sensitivity of LGD parameters to both the micro characteristics of debtors and aggregated macro-level data. Despite the relatively low importance of macro variables in the model combining micro- and macroeconomic information, our estimates suggest that the macroeconomic environment contributes directly to the variation in LGD. The results from the different approaches confirm a negative link between LGD and consumption growth for the retail portfolio, while in the case of the corporate segment, a negative link between LGD and real GDP growth is identified. Importantly, given that aggregation effects and non-linearities may substantially affect the choice of relevant macroeconomic variables, it is essential to distinguish between models employing purely macroeconomic data and models combining micro- and macro-based information.

Suggested Citation

  • Konstantin Belyaev & Aelita Belyaeva & Tomas Konecny & Jakub Seidler & Martin Vojtek, 2012. "Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic," Working Papers 2012/12, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2012/12
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    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2012_12.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jiri Witzany, 2014. "Estimating Default and Recovery Rate Correlations," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 21(33).

    More about this item

    Keywords

    Credit losses; loss given default; recovery rates; work-out LGD.;

    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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