conditions, thus estimating the “downturn LGD”, as the new Basel Capital Accord Basel II
establishes. We suggest a methodology to estimate the downturn LGD distribution to
overcome the arbitrariness of the methods suggested by Basel II. We assume that LGD is a
mixture of an expansion and recession distribution. In this work, we propose an accurate
parametric model for LGD and we estimate its parameters by the EM algorithm. Finally, we …