The simple link from default to LGD

Risk managers often use ad hoc regressions to incorporate loss given default risk into their models. Regression can give good results when data is plentiful, but in reality this data is sparse. Here, Jon Frye introduces a new function that can be more accurate and is easy to implement


Every credit portfolio produces default rates and loss given default (LGD) rates. If the two rates respond to the same conditions then risk is greater, and this affects loan pricing, portfolio optimisation and capital attribution. Any model containing a default rate and an LGD rate must account for their co-movement.

The simple link from default to LGD

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