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Bayesian Loss Given Default Estimation for European Sovereign Bonds

Jobst, Rainer ; Kellner, Ralf ; Rösch, Daniel


We develop and apply a Bayesian model for the loss rates given defaults (LGDs) of European Sovereigns. Financial institutions are in need of LGD forecasts under Pillar II of the regulatory Basel Accord and the downturn in LGD forecasts under Pillar I. Both are challenging for portfolios with a small number of observations such as sovereigns. Our approach comprises parameter risk and generates LGD ...


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