Loss given default as a function of the default rate
نویسنده
چکیده
A recently derived function ties a portfolio’s loss given default rate (LGD) to its default rate. This study compares the predictive performance of the LGD function to that of linear regression using simulated data. The data are simulated using a linear model. Even though this confers an advantage to linear regression, the LGD function produces lower mean squared error over a meaningful range of conditions. This suggests that risk managers can benefit by using the LGD function to model the relationship between default and LGD. The views expressed are the solely author’s and do not necessarily represent the views of the management of the Federal Reserve Bank of Chicago or of the Federal Reserve System.
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