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Loss Given Default Estimating by the Conditional Minimum Value

Author

Listed:
  • Mustapha Ammari

    (National School of Applied Sciences (ENSA), IBN Zohr Agadir 80350, Morocco,)

  • Ghizlane Lakhnati

    (National School of Applied Sciences (ENSA), IBN Zohr Agadir 80350, Morocco.)

Abstract

The Basel Committee offers banks the opportunity to estimate loss given default (LGD) if they wish to calculate their own value for the capital required to cover credit losses. The flexibility to determine LGD values tailored to a bank's portfolio will likely be a motivation for a bank to want to move from the foundation to the advanced internal ratings-based approach. The importance of estimating LGD stems from the fact that a lender's expected loss is the product of the probability of default, the credit exposure at the time of default and the LGD. The Mertonian approach is used for LGD estimation. In this paper, we estimated the (LGD) parameter, using the Merton model, by the introduction of a new parameter which called the conditional minimum value. Four components have been developed in this work: Estimation of conditional minimum, estimation of the LGD, development of a practical component, and finally validation of the proposed model.

Suggested Citation

  • Mustapha Ammari & Ghizlane Lakhnati, 2017. "Loss Given Default Estimating by the Conditional Minimum Value," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 779-785.
    • Handle: RePEc:eco:journ1:2017-03-99
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    References listed on IDEAS

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    1. repec:bla:ecnote:v:33:y:2004:i:2:p:183-208 is not listed on IDEAS
    2. Jafry, Yusuf & Schuermann, Til, 2004. "Measurement, estimation and comparison of credit migration matrices," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2603-2639, November.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Mustapha Ammari & Ghizlane Lakhnati, 2016. "Loss Given Default: Estimating by analyzing the distribution of credit assets and Validation," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 5(2), pages 1-1.
    5. Greg M. Gupton, 2005. "Advancing Loss Given Default Prediction Models: How the Quiet Have Quickened," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(2), pages 185-230, July.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Mustapha Ammari & Ghizlane Lakhnat, 2017. "Default-implied Asset Correlation: Empirical Study for Moroccan Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 415-425.
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    More about this item

    Keywords

    Credit Risk Modeling; Loss Given Default; Rating Model; Basel 2; Merton's Model; Backtesting;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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