Betz, Jennifer and Kellner, Ralf and Rösch, Daniel (2021) Time matters: How default resolution times impact final loss rates. JOURNAL OF THE ROYAL STATISTICAL SOCIETY SERIES C-APPLIED STATISTICS, 70 (3). pp. 619-644. ISSN 0035-9254, 1467-9876
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Using access to a unique bank loss database, we find positive dependencies of default resolution times (DRTs) of defaulted bank loan contracts and final loan loss rates (losses given default, LGDs). Due to this interconnection, LGD predictions made at the time of default and during resolution are subject to censoring. Pure (standard) LGD models are not able to capture effects of censoring. Accordingly, their LGD predictions may be biased and underestimate loss rates of defaulted loans. In this paper, we develop a Bayesian hierarchical modelling framework for DRTs and LGDs. In comparison to previous approaches, we derive final DRT estimates for loans in default which enables consistent LGD predictions conditional on the time in default. Furthermore, adequate unconditional LGD predictions can be derived. The proposed method is applicable to duration processes in general where the final outcomes depend on the duration of the process and are affected by censoring. By this means, we avoid bias of parameter estimates to ensure adequate predictions.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | FORECASTING LOSS; RECOVERY RATES; GIVEN-DEFAULT; REGRESSION; CHAPTER-11; DURATION; MODELS; LOANS; LGD; default resolution time; Global Credit Data; loss given default; random effects |
| Subjects: | 300 Social sciences > 310 General statistics 300 Social sciences > 330 Economics |
| Divisions: | Business, Economics and Information Systems > Institut für Betriebswirtschaftslehre > Lehrstuhl für Statistik und Risikomanagement (Prof. Dr. Rösch) |
| Depositing User: | Dr. Gernot Deinzer |
| Date Deposited: | 26 Aug 2022 06:14 |
| Last Modified: | 26 Aug 2022 06:14 |
| URI: | https://pred.uni-regensburg.de/id/eprint/47042 |
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