Hlawatsch, Stefan, Peter Reichling, "A Framework for Loss Given Default Validation of Retail Portfolios", Journal of Risk Model Validation, Vol. 4, No. 1, (Spring 2010), pp. 23–48.
Abstract: Modeling and estimating loss given default (LGD) is necessary for banks that apply for the internal ratings based approach for retail portfolios. To validate LGD estimations, there are only a few approaches discussed in the literature. In this paper, two models for validating relative LGD and absolute losses are developed. The validation of relative LGD is important for risk-adjusted credit pricing and interest rate calculations. The validation of absolute losses is important to meet the capital requirements of Basel II. Both models are tested with real data from a bank. Estimations are tested for robustness with in-sample and out-of-sample tests.