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Estimating bank loans loss given default by generalized additive models

  • Raffaella Calabrese

    (University of Milano-Bicocca)

With the implementation of the Basel II accord, the development of accurate loss given default models is becoming increasingly important. The main objective of this paper is to propose a new model to estimate Loss Given Default (LGD) for bank loans by applying generalized additive models. Our proposal allows to represent the high concentration of LGDs at the boundaries. The model is useful in uncovering nonlinear covariate effects and in estimating the mean and the variance of LGDs. The suggested model is applied to a comprehensive survey on loan recovery process of Italian banks. To model LGD in downturn conditions, we include macroeconomic variables in the model. Out-of-time validation shows that our model outperforms popular models like Tobit, decision tree and linear regression models for different time horizons.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201224.pdf
File Function: First version, 2012
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201224.

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Length: 18 pages
Date of creation: 22 Oct 2012
Date of revision:
Handle: RePEc:ucd:wpaper:201224
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  1. Radovan Chalupka & Juraj Kopecsni, 2009. "Modeling Bank Loan LGD of Corporate and SME Segments: A Case Study," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 360-382, Oktober.
  2. Carlos González-Aguado & Max Bruche, 2006. "Recovery Rates, Default Probabilities and the Credit Cycle," FMG Discussion Papers dp572, Financial Markets Group.
  3. Bastos, João A., 2010. "Forecasting bank loans loss-given-default," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2510-2517, October.
  4. Stefano Caselli & Stefano Gatti & Francesca Querci, 2008. "The Sensitivity of the Loss Given Default Rate to Systematic Risk: New Empirical Evidence on Bank Loans," Journal of Financial Services Research, Springer, vol. 34(1), pages 1-34, August.
  5. Bellotti, Tony & Crook, Jonathan, 2012. "Loss given default models incorporating macroeconomic variables for credit cards," International Journal of Forecasting, Elsevier, vol. 28(1), pages 171-182.
  6. 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.
  7. Calabrese, Raffaella & Zenga, Michele, 2010. "Bank loan recovery rates: Measuring and nonparametric density estimation," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 903-911, May.
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