Journal of Credit Risk
ISSN:
1744-6619 (print)
1755-9723 (online)
Editor-in-chief: Linda Allen and Jens Hilscher
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Two models of stochastic loss given default
Simone Farinelli and Mykhaylo Shkolnikov
Abstract
ABSTRACT
We propose two structural models for stochastic loss given default that allow the credit losses of a portfolio of defaultable financial instruments to be modeled. The credit losses are integrated into a structural model of default events accounting for correlations between the default events and the associated losses. We show how the models can be calibrated and analyze the impact of correlations between the occurrences of defaults and recoveries by testing our models for a representative sample portfolio.
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