Downturn Loss Given Default: Mixture distribution estimation

Raffaella Calabrese ()

European Journal of Operational Research, 2014, vol. 237, issue 1, 271-277

Abstract: The internal estimates of Loss Given Default (LGD) must reflect economic downturn conditions, thus estimating the “downturn LGD”, as the new Basel Capital Accord Basel II establishes. We suggest a methodology to estimate the downturn LGD distribution to overcome the arbitrariness of the methods suggested by Basel II. We assume that LGD is a mixture of an expansion and recession distribution. In this work, we propose an accurate parametric model for LGD and we estimate its parameters by the EM algorithm. Finally, we apply the proposed model to empirical data on Italian bank loans.

Keywords: Downturn LGD; Mixture model; EM algorithm; Mixed random variable (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:237:y:2014:i:1:p:271-277

DOI: 10.1016/j.ejor.2014.01.043

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