Downturn LGD: A Spot Recovery Approach

Hui Li

MPRA Paper from University Library of Munich, Germany

Abstract: Basel II suggests that banks estimate downturn loss given default (DLGD) to capture the systemic correlation between default rate and loss given default through economic cycles. However, previous approaches in the literature may not be internally consistent and may have bias in capital calculation. In this paper, we propose a new consistent model framework based on our recent work on stochastic spot recovery. We also compare numerically the downturn LGD in our model with some of the previous approaches.

Keywords: Basel II; Downturn Loss Given Default; Stochastic Recovery; Spot Recovery; Factor Credit Models; Default Time Copula; Gaussian Copula; Large Homogeneous Pool; Credit VaR; Expected Shortfall (search for similar items in EconPapers)
JEL-codes: G13 G32 (search for similar items in EconPapers)
Date: 2010-01-13, Revised 2013-04-30
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:71986

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