Abstract
We develop and apply a Bayesian model for loss rates given default (LGDs) of European Sovereigns. Financial institutions are in need of LGD forecasts under Pillar II of the regulatory Basel Accord and downturn 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 forecasts ...
Abstract
We develop and apply a Bayesian model for loss rates given default (LGDs) of European Sovereigns. Financial institutions are in need of LGD forecasts under Pillar II of the regulatory Basel Accord and downturn 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 forecasts under regular as well as downturn conditions. Including sovereign specific rating information, we find average LGD estimates to vary between 0.46 and 0.64, while downturn estimates are between 0.50 and 0.86.
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