Downturn loss given default: Mixture distribution estimation

Research output: Contribution to journalArticlepeer-review

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.
Original languageEnglish
Pages (from-to)271-277
Number of pages7
JournalEuropean Journal of Operational Research
Volume237
Issue number1
Early online date29 Jan 2014
DOIs
Publication statusPublished - 16 Aug 2014

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