Estimating LGD Correlation

15 Pages Posted: 27 May 2009 Last revised: 6 Aug 2009

See all articles by Jiri Witzany

Jiri Witzany

University of Economics in Prague

Date Written: May 26, 2009

Abstract

The paper proposes a new method to estimate correlation of account level Basle II Loss Given Default (LGD). The correlation determines the probability distribution of portfolio level LGD in the context of a copula model which is used to stress the LGD parameter as well as to estimate the LGD discount rate and other parameters. Given historical LGD observations we apply the maximum likelihood method to find the best estimated correlation parameter. The method is applied and analyzed on a real large data set of unsecured retail account level LGDs and the corresponding monthly series of the average LGDs. The correlation estimate comes relatively close to the PD regulatory correlation. It is also tested for stability using the bootstrapping method and used in an efficient formula to estimate ex ante one-year stressed LGD, i.e. one-year LGD quantiles on any reasonable probability level.

Keywords: credit risk, recovery rate, loss given default, correlation, regulatory capital

JEL Classification: G21, G28, C14

Suggested Citation

Witzany, Jiri, Estimating LGD Correlation (May 26, 2009). Available at SSRN: https://ssrn.com/abstract=1410070 or http://dx.doi.org/10.2139/ssrn.1410070

Jiri Witzany (Contact Author)

University of Economics in Prague ( email )

Winston Churchilla Sq. 4
Prague 3, 130 67
Czech Republic

Register to save articles to
your library

Register

Paper statistics

Downloads
328
Abstract Views
1,202
rank
91,455
PlumX Metrics