Work detail

Reduced-form approach to LGD modeling

Author: Mgr. Hlavatá Ivana
Year: 2012 - winter
Leaders: PhDr. Jakub Seidler Ph.D.
Consultants:
Work type: Doctoral
Language: English
Pages: 126
Awards and prizes:
Link:
Abstract: The rigorous thesis deals with the advanced methods for estimating credit risk parameters from
market prices: probability of default (PD) and loss given default (LGD). Precise evaluation of
these parameters is important not only for banks to calculate their regulatory capital but also for
investors to price risky bonds and credit derivatives.
We develop two forward looking reduced-form analytical methods for calculation of PD
and LGD of corporate defaultable bonds based on their quoted market prices, prices of
equivalent risk-free bonds and quoted senior and subordinated credit default swap spreads of the
issuer of these bonds. This is reversed to most of the studies on credit risk modeling, as aim is
not to price instruments based on estimated credit risk parameters, but to calculate these
parameters based on the available market quotes. Furthermore, compared to other studies, the
LGD parameter is assumed to be endogenous and we provide the method for its simultaneous
calculation with the probability of default. Finally, using developed methods, we estimate
implied PD and LGD for nine European banks assuming that the risk is priced correctly by other
investors and the markets are efficient.
Downloadable: Rigorous Thesis Hlavatá

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