A volatility-based single parameter Loss Given Default model

Hank Z. Yang

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 2, 196-210

Abstract: This paper proposes an alternative recovery model (ie Loss Given Default (LGD) Mapping Function) that links LGD to default rate through a single asset volatility parameter. The model is closed-form and easy to calibrate. It may be applied to wholesale credit risk management, such as LGD forecasting, stress testing and integration into the Basel advanced internal rating-based (AIRB) framework. The model may also potentially be applied to market risk management, such as derivation of market-based LGD for the purpose of regulatory credit valuation adjustment (CVA) under Basel advanced CVA capital framework.

Keywords: Basel; CVA; default; LGD; volatility; CDS (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:2:p:196-210

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