A brief note on implied historical loss given default

Rogério F. Porto

Abstract

ABSTRACT

We formally discuss the implied historical method for evaluating loss given default (LGD), mainly in the context of Basel II requirements. For an ex post evaluation, we show that, under some mild assumptions, this method gives results equivalent to the workout LGD method when the average exposures at default for defaulted and nondefaulted assets are equal. We also show that, when these exposures are not equal, the difference between the two methods is more pronounced for a bigger probability of default. Finally, we discuss how the ex post and ex ante evaluations are asymptotically equal.