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 ||Simple||Inverse Gaussian||Observed Covariates||Suboptimal estimator |
|Transformed Regression ||Simple||Inverse Beta||Observed Covariates|
|Fractional Response Regression ||Simple||Logistic||Observed Covariates||Imposes a logistic link function|
|Censored Gamma Regression ||Simple||Truncated Gamma||Observed Covariates|
|Two-Tiered Gamma Regression||Mixture||Truncated Gamma||Observed Covariates||Two latent variables|
|Beta Regression ||Simple||Censored transformed beta||Observed Covariates|
|Inflated Beta Regression ||Mixture||Bernoulli and Beta||Observed Covariates|
|Mixed Effects Model ||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.