Loss given default models incorporating macroeconomic variables for credit cards

Tony Bellotti and Jonathan Crook

International Journal of Forecasting, 2012, vol. 28, issue 1, 171-182

Abstract: Based on UK data for major retail credit cards, we build several models of Loss Given Default based on account level data, including Tobit, a decision tree model, a Beta and fractional logit transformation. We find that Ordinary Least Squares models with macroeconomic variables perform best for forecasting Loss Given Default at the account and portfolio levels on independent hold-out data sets. The inclusion of macroeconomic conditions in the model is important, since it provides a means to model Loss Given Default in downturn conditions, as required by Basel II, and enables stress testing. We find that bank interest rates and the unemployment level significantly affect LGD.

Keywords: Loss given default; Credit cards; Basel II (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (65)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:28:y:2012:i:1:p:171-182

DOI: 10.1016/j.ijforecast.2010.08.005

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