Li, Hui (2010): Downturn LGD: A Spot Recovery Approach.
This is the latest version of this item.

PDF
MPRA_paper_20375.pdf Download (269Kb)  Preview 
Abstract
Basel II suggests that banks estimate downturn loss given default (DLGD) in capital requirement calculation. There have been studies that model the dependence between default rates and losses given default through economic cycles. However, the models proposed are still not satisfactory due to the direct specification of term loss given default. In this paper, we propose a new model framework based on our recent work of stochastic spot recovery for Gaussian copula. We discuss the large homogeneous pool (LHP) limit and derive analytic formula for VaR and expected shortfall in the case of a single systematic factor. We also compare numerically the downturn LGD in our model with those of the previous approaches.
Item Type:  MPRA Paper 

Original Title:  Downturn LGD: A Spot Recovery Approach 
Language:  English 
Keywords:  Basel II, Downturn Loss Given Default, Stochastic Recovery, Spot Recovery, Factor Credit Models, Default Time Copula, Gaussian Copula, Large Homogeneous Pool, Credit VaR, Expected Shortfall 
Subjects:  G  Financial Economics > G3  Corporate Finance and Governance > G32  Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing; Futures Pricing 
Item ID:  20375 
Depositing User:  Hui Li 
Date Deposited:  04. Feb 2010 07:37 
Last Modified:  18. Feb 2013 13:13 
References:  [1] E. Altman (2006): Default Recovery Rates and LGD in the Credit Risk Model and Practice: An Updated Review of the Literature and Empirical Evidence. defaultrisk.com. [2] L. Andersen and J. Sidenius (2004): Extension to the Gaussian Copula: Random Recovery and Random Factor Loading. Journal of Credit Risk 1(1), pp. 2970. [3] M. Barco (2007): Going Downturn. Risk 20(8), pp. 7075. [4] Basel Committee on Banking Supervision (2004): Background Note on LGD Quantification. Bank of International Settlements. [5] Basel Committee on Banking Supervision (2005): Guidance on Paragraph 468 of the Framework Document. Bank of International Settlements. [6] N. Bennani and J. Maetz (2009): A Spot Recovery Rate Extension of the Gaussian Copula. defaultrisk.com. [7] A.Chabaane, JP. Laurent and J. Salomon (2004): Double Impact: Credit Risk Assessment and Collateral Value. Revue Finance, 25, pp. 157178. [8] K. Düllmann and M. Trapp (2004): Systematic risk in recovery rates – an empirical analysis of US corporate credit exposures. Deutsche Bundesbank discussion paper 2. [9] J. Frye (2000): Collateral Damage. Risk 13(4), pp. 9194. [10] G. Giese (2005): The Impact of PD/LGD correlation on Credit Risk Capital. Risk, 18(4), pp. 7884. [11] M. Hillebrand (2006): Modeling and Estimating Dependent Loss Given Default. Risk 19(9), pp. 120125. [12] D. Li (2000): On Default Correlation: A Copula Function Approach. Working Paper, Nr. 9907, RiskMetrics. [13] H. Li (2009): On Models of Stochastic Recovery for Base Correlation. http://mpra.ub.unimuenchen.de/17894 [14] H. Li (2009): Extension of Spot Recovery Model for Gaussian Copula. defaultrisk.com. [15] H. Li (2010): Double Impact on CVA for CDS: WrongWay Risk with Stochastic Recovery. defaultrisk.com [16] P. Miu and B. Ozdemir (2006): Basel Requirement of Downturn LGD: Modeling and Estimating PD and LGD Correlations. Journal of Credit Risk, 2(2), pp. 4368. [17] M. Pykhtin (2003): Unexpected Recovery Risk. Risk 16(8), pp. 7478. [18] D. Rösch and H. Scheule (2005): A MultiFactor Approach for Systematic Default and Recovery Risk. Journal of Fixed Income, 15(2), pp. 6375. [19] D. Tasche (2004): The single risk factor approach to capital charges in case of correlated loss given default rates. Working Paper, Deutsche Bundesbank. [20] O. Vasicek (2002): Loan Portfolio Value. Risk 15(12), pp. 160162. [21] J. Witzany (2009): Loss, Default, and Loss Given Default Modeling. Working Paper, IES. [22] S. Höcht and R. Zagst (2009): Pricing Distressed CDOs with Stochastic Recovery. defaultrisk.com. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/20375 
Available Versions of this Item

Downturn LGD: A Spot Recovery Approach. (deposited 14. Jan 2010 15:58)
 Downturn LGD: A Spot Recovery Approach. (deposited 04. Feb 2010 07:37) [Currently Displayed]