Implied Market Loss Given Default in the Czech Republic: Structural-model approach

by Jakub Seidler of Czech National Bank & Charles University in Prague, and
Petr Jakubík of Czech National Bank & Charles University in Prague

January 2009

Abstract: This paper focuses on the key credit risk parameter - Loss Given Default (LGD). We describe its general properties and determinants with respect to seniority of debt, characteristics of debtors and macroeconomic conditions. Furthermore, we illustrate how the LGD can be extracted from market observable information with help of the adjusted Mertonian structural approach. We present a derivation of the formula for the expected LGD and show its sensitivity with respect to other structural company parameters. Finally, we estimate the 5-year expected LGDs for companies listed on the Prague Stock Exchange and find that the average LGD for this analyzed sample is in the range of 20-45%. To the authors' knowledge, these are the first implied market estimates of LGD in the Czech Republic.

JEL Classification: C02, G13, G33.

Keywords: loss given default, credit risk, structural models.

Published in: Czech Journal of Economics and Finance, Vol. 59, No. 1, (January 2009), pp. 20-40.

Previously titled: Implied Market Loss Given Default: Structural-model approach

Books Referenced in this paper:  (what is this?)

Download paper (515K PDF) 21 pages

Download: data [XLS].

Related reading: Bank Loan Loss Given Default