The Merton Approach to Estimating Loss Given Default: Application to the Czech Republic

Jakub Seidler, Petr Jakubík

This paper focuses on a key credit risk parameter – Loss Given Default (LGD). We illustrate how the LGD can be estimated with the help of an adjusted Mertonian structural approach. We present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other company structural parameters. Finally, we estimate the five-year expected LGDs for companies listed on Prague Stock Exchange and find that the average LGD for the analyzed sample is around 20–50%.

JEL Codes: C02, G13, G33.

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

Issued: December 2009

Download: CNB WP No. 13/2009 (pdf, 441 kB)