European Financial and Accounting Journal 2012, 7(1):6-27 | DOI: 10.18267/j.efaj.12

Survival Analysis in LGD Modeling

Jiří Witzany1, Michal Rychnovský2, Pavel Charamza3
1 RNDr. Jiří Witzany, Ph.D. - associate professor; Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics, Prague, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic; <witzanyj@vse.cz>.
2 Ing., Mgr. Michal Rychnovský, MSc. - doctoral student; Department of Probability and Statistics, Faculty of Informatics and Statistics, University of Economics, Prague, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic; <michal.rychnovsky@gmail.com>.
3 Pavel Charamza - credit portfolio manager, Home Credit Asia N.V., Moravské náměstí 249/8 Brno-město, 602 00 Brno; <pavel.charamza@homecredit.asia>.

The paper proposes an application of the survival time analysis methodology to estimations of the Loss Given Default (LGD) parameter. The main advantage of the survival analysis approach compared to classical regression methods is that it allows exploiting partial recovery data. The model is also modified in order to improve performance of the appropriate goodness of fit measures. The empirical testing shows that the Cox proportional model applied to LGD modeling performs better than the linear and logistic regressions. In addition a significant improvement is achieved with the modified "pseudo" Cox LGD model

Keywords: Correlation, Credit risk, Loss given default, Recovery rate, Regulatory capital
JEL classification: C14, G21, G28

Published: March 1, 2012  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Witzany, J., Rychnovský, M., & Charamza, P. (2012). Survival Analysis in LGD Modeling. European Financial and Accounting Journal, 7(1), 6-27. doi: 10.18267/j.efaj.12
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Altman, E. - Resti, A. - Sironi, A. (2004): Default Recovery Rates in Credit Risk Modelling: A Review of the Literature and Empirical Evidence. Economic Notes by Banca dei Paschi di Siena SpA, 2004, vol. 33, no. 2, pp. 183-208. Go to original source...
    2. Andreeva, G. (2006): European Generic Scoring Models Using Survival Analysis. Journal of the Operational Research Society, 2006, vol. 57, no. 10, pp. 1180-1187. Go to original source...
    3. BCBS (2005): Basel Committee on Banking Supervision, Guidance on Paragraph 468 of the Framework Document. Basel, Basel Committee on Banking Supervision, 2005.
    4. BCBS (2006): International Convergence of Capital Measurement and Capital Standards. A Revised Framework - Comprehensive Version. Basel, Basel Committee on Banking Supervision, 2006.
    5. Breslow, N. A. (1974): Covariance Analysis of Censored Survival Data. Biometrics, 1974, vol. 30, no. 1, pp. 89-99. Go to original source...
    6. Chava, S. - Stefanescu, C. - Turnbull, S. (2008): Modeling the Loss Distribution. [on-line], London, London Business School, c2008, [cit. 25th May, 2012], <http://faculty.london.edu/cstefanescu/Chava_Stefanescu_Turnbull.p df >.
    7. Collet, D. (2003): Modelling Survival Data in Medical Research. London, Chapman & Hall / CRC, 2003.
    8. Cox, D. R. (1972): Regression Models and Life-Tables. Journal of the Royal Statistical Society, 1972, vol. 34, no. 2, pp. 187-220. Go to original source...
    9. Frye, J. (2003): A False Sense of Security, Risk, vol. 16, no. 8, pp. 63-67.
    10. Greene, W. H. (2003): Econometric Analysis, Englewod Cliffs, Prentice Hall, 2003.
    11. Gupton, G. M. (2005): Advancing Loss Given Default Prediction Models: How the Quiet Have Quickened, Economic Notes by Banca dei Paschi di Siena SpA, 2005, vol. 34, no. 2, pp. 185-230 Go to original source...
    12. Huang, X. - Oosterlee, C. W. (2008): Generalized Beta Regression Models for Random Loss-Given-Default. Delft, Delft University of Technology Report 08-10, 2008.
    13. Kalbfleisch, J. D. - Prentice, R. L. (2002): The Statistical Analysis of Failure Time Data. Hoboken, New York, Wiley, 2002. Go to original source...
    14. Narain, B. (1992): Survival Analysis and the Credit Granting Decision. In: Thomas, L. C. - Crook, J. N. - Edelman, D. B. (eds): Credit Scoring and Credit Control. Oxford, Oxford University Press, 1992, pp. 109-122.
    15. Rychnovsky, M. (2009): Mathematical Models of LGD, Diploma Thesis. Praha, Charles University, Faculty of Mathematics and Physics, April 2009.
    16. Schuermann, T. (2004): What Do We Know About Loss Given Default. Credit Risk Models and Management, London, Risk Books, 2004. Go to original source...
    17. Witzany, J. (2009): Unexpected Recovery Risk and LGD Discount Rate Determination. European Financial and Accounting Journal, 2009, vol. 4, no. 1, pp. 61-84. Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY 4.0), which permits use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content