Modeling exposure at default and loss given default: empirical approaches and technical implementation

The Basel Accords have created the need to develop and implement models for probability of default (PD), loss given default (LGD) and exposure at default (EAD). Although PD is quite well researched, LGD and EAD lag behind in terms of both theoretical and practical insight. This paper proposes some empirical approaches for EAD/LGD modeling and provides technical insights into their implementation. It is expected that approaches proposed in the paper will be helpful for modelers and risk managers in their risk modeling and management practice.