Journal of Banking & Finance Vol. 79 2017
Downturn LGD modeling using quantile regression
Abstract
Literature on Losses Given Default (LGD) usually focuses on mean predictions, even though losses are extremely skewed and bimodal. This paper proposes a Quantile Regression (QR) approach to get a comprehensive view on the entire probability distribution of losses. The method allows new insights on covariate effects over the whole LGD spectrum. In particular, middle quantiles are explainable by observable covariates while tail events, e.g., extremely high LGDs, seem to be rather driven by unobservable random events. A comparison of the QR approach with several alternatives from recent literature reveals advantages when evaluating downturn and unexpected credit losses. In addition, we identify limitations of classical mean prediction comparisons and propose alternative goodness of fit measures for the validation of forecasts for the entire LGD distribution.
- DOI
- 10.1016/j.jbankfin.2017.03.001
- Volume
- 79
- Pages
- 42-56
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib