Bayesian loss given default estimation for European sovereign bonds

Rainer Jobst, Ralf Kellner and Daniel Rösch

International Journal of Forecasting, 2020, vol. 36, issue 3, 1073-1091

Abstract: We develop and apply a Bayesian model for the loss rates given defaults (LGDs) of European Sovereigns. Financial institutions are in need of LGD forecasts under Pillar II of the regulatory Basel Accord and the downturn in LGD forecasts under Pillar I. Both are challenging for portfolios with a small number of observations such as sovereigns. Our approach comprises parameter risk and generates LGD forecasts under both regular and downturn conditions. With sovereign-specific rating information, we found that average LGD estimates vary between 0.46 and 0.64, while downturn estimates lay between 0.50 and 0.86.

Keywords: Loss given default; Sovereign bonds; Bayesian estimation; Probability of default; Credit risk (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:36:y:2020:i:3:p:1073-1091

DOI: 10.1016/j.ijforecast.2019.11.004

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