Outline

  • Abstract
  • Keywords
  • 1. Introduction
  • 2. Definition and Basic Characteristics of the Lgd
  • 3. Lgd Modelling
  • 4. Reduced-Form Models
  • 5. Reduced-Form Approach to Pricing Cds
  • 6. Conclusion
  • Acknowledgements
  • References

رئوس مطالب

  • چکیده
  • کلید واژه ها
  • 1.مقدمه
  • 2. تعریف و خصوصیات پایه LGD
  • 3. مدل سازی LGD
  • 4. مدل‌های صورت کاهش یافته
  • 5. رویکرد صورت کاهش یافته به قیمت گذاری CDS
  • 6. نتیجه گیری

Abstract

This paper deals with the methods for estimating credit risk parameters from market prices, e.g. Probability of Default (PD) and Loss Given Default (LGD). Precise evaluation of these parameters is important not only for bank to calculate their regulatory capital but also for investors to price risky bonds and credit derivatives. In this paper, we introduced reduced-form analytical methods for the calculation of LGD to pricing Credit Default Swaps. Reduced-form credit risk models were introduced as a reaction to structural approach, especially trying to decrease informational difficulty when modelling credit risk. In the reduced-form approach, the market value of defaulted bonds is the same as in the fraction recovered from the exposure at default. We use the face value convention, which Hull & White (2000) presented in their model which extended recovery of face value convention for coupon bonds.

Keywords: - - - - -

Conclusions

Credit Risk techniques have undergone significant development in recent decades. This has led to the development of new methods for the estimation of the potential bankruptcy of borrowing entities and parameters specifying possible losses. These parameters include Loss Given Default, expressing the percentage of an exposure which will not be recovered after a counterparty default. While the estimation of the probability of default has received considerable attention over the past 20 years, LGD has gained greater acceptance only in recent years.

Accurate LGD estimation is important for lending, investing or pricing of loan, bonds and credit risky instrument. It is also essential for provisioning reserves for credit losses, determining fair value for any credit risky obligation and calculating risk. The reduced-form modelling is based on the assumption that market prices of defaultable financial instruments disclose the investors’ expectations about credit risk parameters. Reduced-form models have proven to be a useful tool for analysing the dynamics of credit spreads.

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