Downturn LGD: A Spot Recovery Approach

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

Abstract

Basel II suggests that banks estimate downturn loss given default (DLGD) to capture the systemic correlation between default rate and loss given default through economic cycles. However, previous approaches in the literature may not be internally consistent and may have bias in capital calculation. In this paper, we propose a new consistent model framework based on our recent work on stochastic spot recovery. We also compare numerically the downturn LGD in our model with some of the previous approaches.

• Item Type: MPRA Paper
• 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

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