EconPapers    
Economics at your fingertips  
 

Time matters: How default resolution times impact final loss rates

Jennifer Betz, Ralf Kellner and Daniel Rösch

Journal of the Royal Statistical Society Series C, 2021, vol. 70, issue 3, 619-644

Abstract: Using access to a unique bank loss database, we find positive dependencies of default resolution times (DRTs) of defaulted bank loan contracts and final loan loss rates (losses given default, LGDs). Due to this interconnection, LGD predictions made at the time of default and during resolution are subject to censoring. Pure (standard) LGD models are not able to capture effects of censoring. Accordingly, their LGD predictions may be biased and underestimate loss rates of defaulted loans. In this paper, we develop a Bayesian hierarchical modelling framework for DRTs and LGDs. In comparison to previous approaches, we derive final DRT estimates for loans in default which enables consistent LGD predictions conditional on the time in default. Furthermore, adequate unconditional LGD predictions can be derived. The proposed method is applicable to duration processes in general where the final outcomes depend on the duration of the process and are affected by censoring. By this means, we avoid bias of parameter estimates to ensure adequate predictions.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.1111/rssc.12474

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jorssc:v:70:y:2021:i:3:p:619-644

Ordering information: This journal article can be ordered from
http://ordering.onli ... 1111/(ISSN)1467-9876

Access Statistics for this article

Journal of the Royal Statistical Society Series C is currently edited by R. Chandler and P. W. F. Smith

More articles in Journal of the Royal Statistical Society Series C from Royal Statistical Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2022-01-25
Handle: RePEc:bla:jorssc:v:70:y:2021:i:3:p:619-644