Modelling Downturn Loss Given Default
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.
|Date of creation:||23 Nov 2012|
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- Renault, Olivier & Scaillet, Olivier, 2004.
"On the way to recovery: A nonparametric bias free estimation of recovery rate densities,"
Journal of Banking & Finance,
Elsevier, vol. 28(12), pages 2915-2931, December.
- 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.
- 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.
- Andrew J. Filardo, 1993. "Business cycle phases and their transitional dynamics," Research Working Paper 93-14, Federal Reserve Bank of Kansas City.
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