A Non-parametric Approach to Incorporating Incomplete Workouts Into Loss Given Default Estimates
When estimating Loss Given Default (LGD) parameters using a workout approach, i.e. discounting cash flows over the workout period, the problem arises of how to take into account partial recoveries from incomplete work-outs. The simplest approach would see LGD based on complete recovery profiles only. Whilst simple, this approach may lead to data selection bias, which may be at the basis of regulatory guidance requiring the assessment of the relevance of incomplete workouts to LGD estimation. Despite its importance, few academic contributions have covered this topic. We enhance this literature by developing a non-parametric estimator that -under certain distributional assumptions on the recovery profiles- aggregates complete and incomplete workout data to produce unbiased and more efficient estimates of mean LGD than those obtained from the estimator based on resolved cases only. Our estimator is appropriate in LGD estimation for wholesale portfolios, where the exposure-weighted LGD estimators available in the literature would not be applicable under Basel II regulatory guidance.
|Date of creation:||16 Nov 2010|
|Date of revision:||16 Nov 2010|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fuller, Russell J. & Kim, Sang-Hoon, 1980. "Inter-Temporal Correlation of Cash Flows and the Risk of Multi-Period Investment Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(05), pages 1149-1162, December.
- Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: theory," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 3-33, August.
- Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-922, September.
- Dermine, J. & de Carvalho, C. Neto, 2006. "Bank loan losses-given-default: A case study," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1219-1243, April.
- Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: applications," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 133-161, October.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:26797. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.