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Downturn LGD: A Spot Recovery Approach

Li, Hui (2010): Downturn LGD: A Spot Recovery Approach.

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Abstract

Basel II suggests that banks estimate downturn loss given default (DLGD) in capital requirement calculation. There have been studies that focused on the dependence of default rates and loss given defaults through economic cycles. However, the models proposed are still not satisfactory. In this paper, we propose a new model framework based on our recent work of stochastic spot recovery for Gaussian copula. We also compare our model with the previous approaches.

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