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 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 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/20375 
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Downturn LGD: A Spot Recovery Approach. (deposited 14. Jan 2010 15:58)
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