Validation of loss given default for corporate

This paper presents an contemporary approach for development and validation of Loss given default (LGD) in accordance with the Basel Accords standards. The modeling data set has been based on data on recoveries of outstanding debts from corporate entities in Republic of Serbia that defaulted. The aim of the paper is to develop a LGD model capable of confirming the validity of historically observed LGD estimates on the sample of corporate entities that defaulted. The modelling approach in this research is based on average LGD without time or exposure weightening. The probability density function of realized empirical LGDs has been created by beta distribution usage. The validation process on proposed LGD model has been performed by throughout testing of: cumulative LGD accuracy ratio, mean square error calculation and regression analysis. On the basis of obtained results, the possibilities of application of the developed LGD model are proposed and discussed.