Petr Jakubík, Jakub Seidler
This article discusses the estimation of a key credit risk parameter – loss given default (LGD) – and calculates it for selected companies traded on the Prague Stock Exchange. The importance of estimating LGD stems from the fact that a lender’s expected loss is the product of the probability of default, the credit exposure at the time of default and the LGD. The Mertonian structural approach is used for LGD estimation. This technique enables us to derive LGD for publicly traded companies from a knowledge of their debt and share prices. It is reasonable to assume that the resulting LGD calculated for selected companies traded on the Prague Stock Exchange represents a lower estimate of this parameter for the entire corporate sector.
Issued: June 2009
Download: Thematic article in the Financial Stability Report 2008/2009 (pdf, 111 kB)