The economy and loss given default: evidence from two UK retail lending data sets
The economy and loss given default: evidence from two UK retail lending data sets
Loss given default (LGD) models predict losses as a proportion of the outstanding loan, in the event a debtor goes into default. The literature on corporate sector LGD models suggests LGD is correlated to the economy and so changes in the economy could translate into different predictions of losses. In this work, the role of macroeconomic variables in loan-level retail LGD models is examined by testing the inclusion of macroeconomic variables in two different retail LGD models: a two-stage model for a residential mortgage loans data set and an ordinary least squares model for an unsecured personal loans data set. To improve loan-level predictions of LGD, indicators relating to the macroeconomy are considered with mixed results: the selected macroeconomic variable seemed able to improve the predictive performance of mortgage loan LGD estimates, but not for personal loan LGD. For mortgage loan LGD, interest rate was most beneficial but only predicted better during downturn periods, underestimating LGD during non-downturn periods. For personal loan LGD, only net lending growth is statistically significant but including this variable did not bring any improvement to R2.
363-375
Leow, M.
c6736da0-476c-45b3-8f66-9a2269a34acb
Mues, C.
07438e46-bad6-48ba-8f56-f945bc2ff934
Thomas, L.C.
a3ce3068-328b-4bce-889f-965b0b9d2362
October 2013
Leow, M.
c6736da0-476c-45b3-8f66-9a2269a34acb
Mues, C.
07438e46-bad6-48ba-8f56-f945bc2ff934
Thomas, L.C.
a3ce3068-328b-4bce-889f-965b0b9d2362
Leow, M., Mues, C. and Thomas, L.C.
(2013)
The economy and loss given default: evidence from two UK retail lending data sets.
Journal of the Operational Research Society, 65, .
(doi:10.1057/jors.2013.120).
Abstract
Loss given default (LGD) models predict losses as a proportion of the outstanding loan, in the event a debtor goes into default. The literature on corporate sector LGD models suggests LGD is correlated to the economy and so changes in the economy could translate into different predictions of losses. In this work, the role of macroeconomic variables in loan-level retail LGD models is examined by testing the inclusion of macroeconomic variables in two different retail LGD models: a two-stage model for a residential mortgage loans data set and an ordinary least squares model for an unsecured personal loans data set. To improve loan-level predictions of LGD, indicators relating to the macroeconomy are considered with mixed results: the selected macroeconomic variable seemed able to improve the predictive performance of mortgage loan LGD estimates, but not for personal loan LGD. For mortgage loan LGD, interest rate was most beneficial but only predicted better during downturn periods, underestimating LGD during non-downturn periods. For personal loan LGD, only net lending growth is statistically significant but including this variable did not bring any improvement to R2.
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Published date: October 2013
Organisations:
Southampton Business School
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Local EPrints ID: 362657
URI: http://eprints.soton.ac.uk/id/eprint/362657
ISSN: 0160-5682
PURE UUID: dcba3206-f8b3-4a26-914d-f917ac24098c
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Date deposited: 03 Mar 2014 15:14
Last modified: 15 Mar 2024 03:20
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Author:
M. Leow
Author:
L.C. Thomas
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