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Downturn LGD: A Spot Recovery Approach

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  • Li, Hui

Abstract

Basel II suggests that banks estimate downturn loss given default (DLGD) in capital requirement calculation. There have been studies that focused on the dependence of default rates and loss given defaults through economic cycles. However, the models proposed are still not satisfactory. In this paper, we propose a new model framework based on our recent work of stochastic spot recovery for Gaussian copula. We also compare our model with the previous approaches.

Suggested Citation

  • Li, Hui, 2010. "Downturn LGD: A Spot Recovery Approach," MPRA Paper 20010, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:20010
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    References listed on IDEAS

    as
    1. Li, Hui, 2009. "Extension of Spot Recovery Model for Gaussian Copula," MPRA Paper 17944, University Library of Munich, Germany.
    2. Li, Hui, 2009. "On Models of Stochastic Recovery for Base Correlation," MPRA Paper 15750, University Library of Munich, Germany.
    3. Daniel Rösch & Harald Scheule, 2006. "A Multi-Factor Approach for Systematic Default and Recovery Risk," Springer Books, in: Bernd Engelmann & Robert Rauhmeier (ed.), The Basel II Risk Parameters, chapter 0, pages 105-125, Springer.
    4. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.
    5. Dirk Tasche, 2004. "The single risk factor approach to capital charges in case of correlated loss given default rates," Papers cond-mat/0402390, arXiv.org, revised Feb 2004.
    6. repec:uts:ppaper:v:15:y:2005:i:3:p:63-75 is not listed on IDEAS
    7. Düllmann, Klaus & Trapp, Monika, 2004. "Systematic Risk in Recovery Rates: An Empirical Analysis of US Corporate Credit Exposures," Discussion Paper Series 2: Banking and Financial Studies 2004,02, Deutsche Bundesbank.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Karandish, Fatemeh & Šimůnek, Jiří, 2017. "Two-dimensional modeling of nitrogen and water dynamics for various N-managed water-saving irrigation strategies using HYDRUS," Agricultural Water Management, Elsevier, vol. 193(C), pages 174-190.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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