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Modelling Downturn Loss Given Default

  • Raffaella Calabrese

    (University of Milano-Bicocca, Milan, Italy)

Basel II requires that the internal estimates of Loss Given Default (LGD) reflect economic downturn conditions, thus modelling the "downturn LGD". In this work we suggest a methodology to estimate the downturn LGD distribution. Under the assumption that LGD is a mixture of an expansion and a recession distribution, an accurate parametric model for LGD is proposed and its parameters are estimated by the EM algorithm. Finally, we apply the proposed model to empirical data on Italian bank loans.

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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201226.

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Length: 13 pages
Date of creation: 23 Nov 2012
Date of revision:
Handle: RePEc:ucd:wpaper:201226
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  1. Olivier RENAULT & Olivier SCAILLET, 2003. "On the Way to Recovery: A Nonparametric Bias Free Estimation of Recovery Rate Densities," FAME Research Paper Series rp83, International Center for Financial Asset Management and Engineering.
  2. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
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