Beyond the contract: client behavior from origination to def

Beyond the contract: client behavior from origination to default as the new set of the loss given default risk drivers


Journal of Risk Model Validation
24 February 2021
Beyond the contract: client behavior from origination to default as the new set of the loss given default risk drivers
Parametric and non-parametric models are prepared for the recovery rate estimation.
Adding client related variables reduces the errors and improve discrimination.
The effect is more visible for fractional regression rather than regression tree.
Abstract
Modeling loss given default has increased in popularity as it has become a crucial parameter for establishing capital buffers under Basel II and III and for calculating the impairment of financial assets under the International Financial Reporting Standard 9. The most recent literature on this topic focuses mainly on estimation methods and less on the variables used to explain the variability in loss given default. In this paper, we expand this part of the modeling process by constructing a set of client-behavior-based predictors that can be used to construct more precise models, and we investigate the economic justifications empirically to examine their potential usage. The main novelty introduced in this paper is the connection between loss given default and the behavior of the contract owner, not just the contract itself. This approach results in the reduction of the values of selected error measures and progressively improves the forecasting ability. The effect is more visible in a parametric method (fractional regression) than in a nonparametric method (regression tree). Our findings support incorporating client-oriented information into loss given default models.

Related Keywords

, International Financial Reporting Standard , Credit Risk , Retail Banking , Recovery Rates , Loss Given Default Lgd , Risk Model Validation , Original Research , சர்வதேச நிதி புகாரளித்தல் தரநிலை , கடன் ஆபத்து , சில்லறை வங்கி , மீட்பு ரேட்ஸ் , இழப்பு கொடுக்கப்பட்டது இயல்புநிலை எல்ஜிடி , ஆபத்து மாதிரி சரிபார்த்தல் , ஒரிஜிநல் ஆராய்ச்சி ,

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