{"id":{"repo_id":"uwo","oai_identifier":"oai:uwo.scholaris.ca:20.500.14721/30507"},"canonical_url":"https://search.dev.ndltd.org/etd/uwo/oai:uwo.scholaris.ca:20.500.14721/30507","repository":{"repo_id":"uwo","name":"Western University","base_url":"https://uwo.scholaris.ca/server/oai/request"},"display":{"title":"A Treatise of PD-LGD Correlation Modelling","abstract":"The provision in Paragraph 468 of Basel II Framework Document for calculating loss given default (LGD) requires that parameters used in Pillar I of Basel II capital estimations must be reflective of economic downturn conditions so that relevant risks are accounted for. This provision is based on the fact that the probability of default (PD) and LGD correlations are not captured in the proposed formula for estimating economic capital. To help quantify economic downturn LGD, the Basel Committee proposed establishing a functional relationship between long-run and downturn LGD. To the best of our knowledge, the current proposed models that map out this relationship have the same underlying framework. This thesis presents a general factor PD-LGD correlation model within the conditional independence framework, where obligors’ defaults are conditional on a common state of affairs in the economy. We highlight a mistake that is frequently made in specifying loss given default, which is, current studies ignore the difference between account-level potential loss and LGD. By correcting this mistake and deriving the correct distribution of potential loss and LGD, sensitivity analysis is conducted to ascertain the impact of the defective model on economic capital and parameter estimates. The relationship between the account and portfolio level correlations are explored. Finally, an empirical analysis is conducted to validate the proposed estimation scheme of parameters in the model.","abstract_html":"The provision in Paragraph 468 of Basel II Framework Document for calculating loss given default (LGD) requires that parameters used in Pillar I of Basel II capital estimations must be reflective of economic downturn conditions so that relevant risks are accounted for. This provision is based on the fact that the probability of default (PD) and LGD correlations are not captured in the proposed formula for estimating economic capital. To help quantify economic downturn LGD, the Basel Committee proposed establishing a functional relationship between long-run and downturn LGD. To the best of our knowledge, the current proposed models that map out this relationship have the same underlying framework. This thesis presents a general factor PD-LGD correlation model within the conditional independence framework, where obligors’ defaults are conditional on a common state of affairs in the economy. We highlight a mistake that is frequently made in specifying loss given default, which is, current studies ignore the difference between account-level potential loss and LGD. By correcting this mistake and deriving the correct distribution of potential loss and LGD, sensitivity analysis is conducted to ascertain the impact of the defective model on economic capital and parameter estimates. The relationship between the account and portfolio level correlations are explored. Finally, an empirical analysis is conducted to validate the proposed estimation scheme of parameters in the model.","abstract_has_math":false,"creators":["Avusuglo, Wisdom S"],"institution":"The University of Western Ontario","degree_name":"Ph D","degree_level":null,"degree_discipline":"Statistics and Actuarial Sciences","degree_department":null,"school":null,"contributors":[],"advisors":["Reesor Mark R","Metzler Adam"],"committee_chairs":[],"committee_members":[],"year":2020,"date_issued":"2020-08-25","date_published":"2020-08-25","updated_at":"2026-07-27T21:55:58Z","subjects":["PD-LGD correlation","potential loss","realized loss","systematic and idiosyncratic risk factors","economic and regulatory capital."],"languages":["en_ca"],"rights":[],"rights_urls":[],"identifier_entries":[]},"links":{"outbound_url":"https://hdl.handle.net/20.500.14721/30507","outbound_label":"Handle","outbound_source":"dc:identifier.uri"},"metadata_groups":[{"id":"people","label":"People","entries":[{"key":"dc:contributor.advisor","label":"Advisor","values":["Reesor Mark R","Metzler Adam"]},{"key":"dc:creator","label":"Author","values":["Avusuglo, Wisdom S"]}]},{"id":"academic_context","label":"Academic Context","entries":[{"key":"dc:date.accessioned","label":"Dc Date Accessioned","values":["2025-07-10T18:41:39Z"]},{"key":"dc:date.available","label":"Dc Date Available","values":["2025-07-10T18:41:39Z"]},{"key":"dc:date.issued","label":"Date","values":["2020-08-25"]},{"key":"dc:publisher","label":"Institution","values":["The University of Western Ontario"]},{"key":"dc:type","label":"Dc Type","values":["thesis"]},{"key":"thesis:degree_discipline","label":"Discipline","values":["Statistics and Actuarial Sciences"]},{"key":"thesis:degree_name","label":"Degree Name","values":["Ph D"]}]},{"id":"subjects_keywords","label":"Subjects and Keywords","entries":[{"key":"dc:subject","label":"Dc Subject","values":["PD-LGD correlation","potential loss","realized loss","systematic and idiosyncratic risk factors","economic and regulatory capital."]}]},{"id":"language_rights","label":"Language and Rights","entries":[{"key":"dc:language.iso","label":"Language (ISO)","values":["en_ca"]}]},{"id":"identifiers","label":"Identifiers","entries":[{"key":"dc:identifier.uri","label":"Identifier URI","values":["https://hdl.handle.net/20.500.14721/30507"]}]},{"id":"additional","label":"Additional Metadata","entries":[{"key":"dc:description","label":"Description","values":["The thesis cover page in the PDF document includes references to Western University’s previous institutional repository platform, known as Scholarship@Western, and links to that platform (beginning with ir.lib.uwo.ca). In citing or referring to this thesis, use the DOI or handle from this page instead. Sample citation: Author name, \"Thesis title.\" (Year). Western University Open Repository. https://doi.org/10.71858/123456."]},{"key":"dc:description.abstract","label":"Abstract","values":["The provision in Paragraph 468 of Basel II Framework Document for calculating loss given default (LGD) requires that parameters used in Pillar I of Basel II capital estimations must be reflective of economic downturn conditions so that relevant risks are accounted for. This provision is based on the fact that the probability of default (PD) and LGD correlations are not captured in the proposed formula for estimating economic capital. To help quantify economic downturn LGD, the Basel Committee proposed establishing a functional relationship between long-run and downturn LGD. To the best of our knowledge, the current proposed models that map out this relationship have the same underlying framework. This thesis presents a general factor PD-LGD correlation model within the conditional independence framework, where obligors’ defaults are conditional on a common state of affairs in the economy. We highlight a mistake that is frequently made in specifying loss given default, which is, current studies ignore the difference between account-level potential loss and LGD. By correcting this mistake and deriving the correct distribution of potential loss and LGD, sensitivity analysis is conducted to ascertain the impact of the defective model on economic capital and parameter estimates. The relationship between the account and portfolio level correlations are explored. 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