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henrywuhu
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Joined: May 24th, 2015, 9:57 pm

Expected Loss Calculation

June 22nd, 2017, 10:41 pm

Hi there. With IFRS9, If I want to use the CDS Spreads in order to get the probability of default. Should I use the bid spread, the ask spread or the mid spread?
Henry Wu Hu
 
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outrun
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Joined: April 29th, 2016, 1:40 pm

Re: Expected Loss Calculation

June 23rd, 2017, 8:55 am

The bid-ask spread gives you uncertainty in your pd estimate, and I think you should then (in IFRS9 guidelines) add conservatism to compensate for that uncertainty? Is that so?

Also, I expect CDS to give a skewed view on pd, there is probably more demand than supply for cdss?

So either the mid, or if you're forced to include conservatism because of model risk then pick the side that gives the highest pd.
 
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MTorrejon
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Joined: April 21st, 2016, 2:11 pm

Re: Expected Loss Calculation

September 23rd, 2017, 9:33 pm

I would not recommend using CDS spreads since these give risk neutral PD that mostly overestmate the historical (real one) PD used for risk management calculations (modulo xva)
 
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Nephalem
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Joined: September 20th, 2016, 12:01 pm

Re: Expected Loss Calculation

October 19th, 2017, 6:37 pm

This is not about conservatism or historical vs risk neutral battle. This is about FV which is defined clearly as what you receive if close position. You close it with ask CDS (big Z-spread) or bid loan.
 
rrao4
Posts: 10
Joined: May 3rd, 2017, 1:14 am

Re: Expected Loss Calculation

November 20th, 2017, 6:05 pm

outrun wrote:
The bid-ask spread gives you uncertainty in your pd estimate, and I think you should then (in IFRS9 guidelines) add conservatism to compensate for that uncertainty? Is that so?

Also, I expect CDS to give a skewed view on pd, there is probably more demand than supply for cdss?

So either the mid, or if you're forced to include conservatism because of model risk then pick the side that gives the highest pd.

IFRS 9 requires that there should not be any conservatism built into the estimates. Mid point would be a better way. Typically, banks are modeling PD, LGD and EAD for both IFRS 9/CECL
 
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Dave747
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Joined: November 4th, 2014, 4:14 pm

Re: Expected Loss Calculation

November 21st, 2017, 7:14 am

Sorry, but wouldn't the above approach give you a TTC (Through the Cycle) PD, whilst for ECL you're supposed to use the PIT (Point in Time) approach?
 
rrao4
Posts: 10
Joined: May 3rd, 2017, 1:14 am

Re: Expected Loss Calculation

November 21st, 2017, 2:35 pm

Dave747 wrote:
Sorry, but wouldn't the above approach give you a TTC (Through the Cycle) PD, whilst for ECL you're supposed to use the PIT (Point in Time) approach?
Depends upon how one designs the estimation sample. After all, estimation needs to be done for retail portfolios for which no CDS spread is available
 
Josesv
Posts: 10
Joined: November 3rd, 2017, 12:40 am

Re: Expected Loss Calculation

November 24th, 2017, 4:41 am

Because you do not use a calculation tool to determine the values you need how https://alpari.com/en/trading/calculator/
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