Abstract
This paper focuses on a key credit risk parameter – Loss Given Default (LGD). We illustrate how the LGD can be estimated with the help of an adjusted Mertonian structural approach.
We present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other company structural parameters. Finally, we estimate the five-year expected LGDs for companies listed on Prague Stock Exchange and find that the average LGD for the analyzed sample is around 20–50%.