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The Impact Of PD-LGD Correlation On Expected Loss And Economic Capital

International Business & Economics Research Journal

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Field Value
 
Title The Impact Of PD-LGD Correlation On Expected Loss And Economic Capital
 
Creator van Vuuren, Gary
de Jongh, Riaan
Verster, Tanja
 
Subject Nuclear Physicist; Econometrician; Business Mathematics And Informatics (BMI); Credit Scoring; Data Mining; Statistical Consulting
Probability Of Default; Loss Given Default; Correlation; Economic Capital; Expected Loss
 
Description The Basel regulatory credit risk rules for expected losses require banks use downturn loss given default (LGD) estimates because the correlation between the probability of default (PD) and LGD is not captured, even though this has been repeatedly demonstrated by empirical research. A model is examined which captures this correlation using empirically-observed default frequencies and simulated LGD and default data of a loan portfolio. The model is tested under various conditions dictated by input parameters. Having established an estimate of the impact on expected losses, it is speculated that the model be calibrated using banks' own loss data to compensate for the omission of correlation dependence. Because the model relies on observed default frequencies, it could be used to adapt in real time, forcing provisions to be dynamically allocated.
 
Publisher The Clute Institute
 
Date 2017-06-30
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier https://www.cluteinstitute.com/ojs/index.php/IBER/article/view/9975
10.19030/iber.v16i3.9975
 
Source International Business & Economics Research Journal (IBER); Vol 16 No 3 (2017); 157-170
2157-9393
1535-0754
 
Language eng
 
Relation https://www.cluteinstitute.com/ojs/index.php/IBER/article/view/9975/10077
 
Rights Copyright (c) 2017 International Business & Economics Research Journal (IBER)