This page aims to be a comprehensive collection of publicly documented models and algorithms used for loss given default modelling.
The loss given default model collection focuses on ex-ante LGD models applied to performing credit exposures. Out of scope for this page are the related Non-Performing Loan Valuation models.
Loss given default models have been used globally for decades and in a variety of credit risk management contexts. This results in a large variety of possible quantification approaches, depending on the nature of the credit risk, the data and expertise available etc. A classification of typical LGD Model categories would include:
This a live catalog of statistical loss given default models (algorithms). Models in the "Non-statistical category" are currently not represented but the scope and granularity of both model coverage and model characteristics may increase!
Model Name | Simple / Composite | Distribution | Dynamic Factors | Remarks |
---|---|---|---|---|
Linear Regression (OLS) | Simple | Normal | Observed Covariates | Does not enforce appropriate LGD bounds |
Transformed Regression ^{[2]} | Simple | Inverse Gaussian | Observed Covariates | Suboptimal estimator ^{[3]} |
Transformed Regression ^{[4]} | Simple | Inverse Beta | Observed Covariates | |
Fractional Response Regression ^{[5]} | Simple | Logistic | Observed Covariates | Imposes a logistic link function |
Censored Gamma Regression ^{[6]} | Simple | Truncated Gamma | Observed Covariates | |
Two-Tiered Gamma Regression^{[7]} | Mixture | Truncated Gamma | Observed Covariates | Two latent variables |
Beta Regression ^{[8]} | Simple | Censored transformed beta | Observed Covariates | |
Inflated Beta Regression ^{[9]} | Mixture | Bernoulli and Beta | Observed Covariates | |
Mixed Effects Model ^{[10]} | Simple | Inverse Logit | Observed Covariates and Latent Factor |
Collective (Portfolio-wide recovery rate) versus Individual facility models. For retail portfolios it may be the case that the LGD models are estimated and used always at a portfolio level, with the implicit assumption that all credit exposures within the portfolio are homogeneous with respect to LGD risk factors.
List of references (academic / other publications). Preference should be given to:
The list is not aimed to establish academic priority but to provide sufficient documentation for each listed model. Multiple references are ok if they complement each other.
Usual disclaimer applies: Inclusion in the list does not imply any assurances about correctness, completeness or suitability.