Estimating bank loans loss given default by generalized additive models
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.
|Date of creation:||22 Oct 2012|
|Date of revision:|
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- 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.
- Max Bruche & Carlos Gonzalez-Aguado, 2006.
"Recovery rates, default probabilities and the credit cycle,"
LSE Research Online Documents on Economics
24524, London School of Economics and Political Science, LSE Library.
- Bruche, Max & González-Aguado, Carlos, 2010. "Recovery rates, default probabilities, and the credit cycle," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 754-764, April.
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- Carlos González-Aguado & Max Bruche, 2006. "Recovery Rates, Default Probabilities and the Credit Cycle," FMG Discussion Papers dp572, Financial Markets Group.
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- Bastos, João A., 2010.
"Forecasting bank loans loss-given-default,"
Journal of Banking & Finance,
Elsevier, vol. 34(10), pages 2510-2517, October.
- 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.
- 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.
- Radovan Chalupka & Juraj Kopecsni, 2008. "Modelling Bank Loan LGD of Corporate and SME Segments: A Case Study," Working Papers IES 2008/27, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2008.
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