Reduced-form approach to LGD modelling

• Název práce v češtině: Modelování parametru LGD pomocí redukovaných modelů
• Název v anglickém jazyce: Reduced-form approach to LGD modelling
• Klíčová slova: Loss Given Default, Default Probability, Credit Risk
• Klíčová slova anglicky: Loss Given Default, Default Probability, Credit Risk
• Akademický rok vypsání: 2010/2011
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Jakub Seidler, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 01.03.2011
• Datum zadání: 02.03.2011
• Datum a čas obhajoby: 13.09.2011 08:30
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 31.07.2011
• Datum proběhlé obhajoby: 13.09.2011
• Oponenti: PhDr. Boril Šopov, M.Sc., LL.M.

Seznam odborné literatury

Altman et al. (2003): The Link between Default and Recovery Rates: Implication for Credit Risk Models
and Procyclicality, Mimeo, pp. 1–46.
Altman, E. (1989): Measuring Corporate Bond Mortality and Performance, Journal of Finance, 44,
1989, pp. 909–922.
Duffie, D. (1998): Defaultable Term Structure Models with Fractional Recovery of Par, Working Paper,
Graduate School of Business, Stanford University, 1999.
Duffie, D., Singleton, J. (1999): Modeling Term Structures of Defaultable Bonds, The Review of Financial
Studies, Vol. 12, No. 4, 1999, pp. 687–720.
Fisher, L. (1959): Determinants of the Risk Premiums on Corporate Bonds, Journal of Political Economy,
Vol. 67, 1969, pp. 217–237.
Hamerle, A. (2006): Modelling Loss Given Default: A Point in Time Approach, In Engelmann, B.,
Rauhmeier, R., (eds): The Basel II Risk Parameters – Estimation, Validation and Stress Testing, Heidelberg:
Springer, 2006, pp. 127–142, ISBN 3-540-33085-2.
Jarrow, R., Lando, D., Turnbull, S. (1997): A Markov Model for the Term Structure of Credit Spreads, Review
of Financial Studies, Vol. 10, 1997, pp. 481–523.
Jarrow, R., Protter, P. (2004): Structural Versus Reduced Form Models: A New Information Based Perspective,
Journal Of Investment Management, Vol. 2, No. 2, 2004, pp. 1–10.
Jarrow, R., Turnbull, S. (1995): Pricing Derivatives on Financial Securities Subject to Credit Risk, The
Journal of Finance, Vol. 50, No. 1, March 1995, pp. 53–85.
Madan, D., Bakshi, G., Zhang, F. (2006): Understanding the Role of Recovery in Default Risk Models: Empirical
Comparisons and Implied Recovery Rates, FDIC Center for Financial Research, Working Paper, No.
06, 2006.
Madan, D., Unal, H. (1998): Pricing the Risks of Default, Review of Derivatives Research, Boston, Vol. 2,
1998, pp. 121–160.
Schuermann, T. (2004): What do we know about Loss Given Default?, New York: Federal Reserve
Bank, February 2004.

Předběžná náplň práce

Thanks to the New Basel Accord (2006) under the Advanced IRB approach are banks allowed to calculate credit risk parameters on their own. This approach is based on three main parametres used for estimating credit risks: PD, a probability of default of obligor over one-year horizont; LGD, a loss the creditor will incurre given the default of an obligor; EAD, exposure at default.
The measurement of LGD, is nowdays a complex problem in credit risk management. There are three approaches how to measure it: market LGD, based on market prices of defaulted bonds or loans; workout LGD, based on estimated cash flows resulting from the workout process; implied market LGD, derived from market prices of non-defaulted bonds or loans.
At first, implied market LGD can be estimated using the structural models, which employ the structural characteristics of the company such as asset volatility or leverage that determine relevant credit risk elements. Recently, an attempt to overcome limitations of structural models’ applicability gave rise to different approach, the reduced-form models. These models are based on purely probabilistic approach with default modeled by Poisson jump processes.
The thesis will be intent on implied market LGD approach. We suppose that key risk parameter LGD can be extracted from credit spreads about risk-free bonds using reduced-form models approach.

Předběžná náplň práce v anglickém jazyce

Thanks to the New Basel Accord (2006) under the Advanced IRB approach are banks allowed to calculate credit risk parameters on their own. This approach is based on three main parametres used for estimating credit risks: PD, a probability of default of obligor over one-year horizont; LGD, a loss the creditor will incurre given the default of an obligor; EAD, exposure at default.
The measurement of LGD, is nowdays a complex problem in credit risk management. There are three approaches how to measure it: market LGD, based on market prices of defaulted bonds or loans; workout LGD, based on estimated cash flows resulting from the workout process; implied market LGD, derived from market prices of non-defaulted bonds or loans.
At first, implied market LGD can be estimated using the structural models, which employ the structural characteristics of the company such as asset volatility or leverage that determine relevant credit risk elements. Recently, an attempt to overcome limitations of structural models’ applicability gave rise to different approach, the reduced-form models. These models are based on purely probabilistic approach with default modeled by Poisson jump processes.
The thesis will be intent on implied market LGD approach. We suppose that key risk parameter LGD can be extracted from credit spreads about risk-free bonds using reduced-form models approach.