From Default Distribution to Loss Distribution: Vasicek Mertonization

Osadchiy, Maksim and Sidorov, Alexander (2020): From Default Distribution to Loss Distribution: Vasicek Mertonization.

Abstract

The Vasicek-Merton (VM) loss distribution function was derived using the Vasicek and the Merton models as an alternative to the AIRB approach. A loan was modeled as a portfolio of a risk-free bond, and a weighted combination of short European vanilla and binary put options written on the assets of the firm, with the strike equal to its debt and expiration equal to maturity of the loan. An endogenous Loss Given Default (LGD) was derived on the base of the Vasicek-Merton CDF.

• Item Type: MPRA Paper
• Language: English
• Keywords: loss distribution; loss given default; Vasicek model; Merton firm; AIRB model
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; 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 > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation

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