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Hey guys I have to do a calculation for my BA. More precisely, I have to determine the expected loss of a company.

For this I need the probability of default. What options do I have to determine this myself. I have read many papers that simply don't tell me how to implement something like this in practice.

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There are many ways to get physical PD, some much simpler and less data-intensive than others.

If you are really required to jump through all the hoops in IFRS 9, then the books The New Impairment Model Under IFRS 9 and CECL by Jing Zhang (Moody's) and IFRS 9 and CECL Credit Risk Modelling and Validation: A Practical Guide with Examples Worked in R and SAS by Tiziano Bellini probably have all the details one need to implement it. You will also need a lot of historical data.

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    $\begingroup$ Danke für den Literaturtipp! $\endgroup$ – Dennis Khavkin Nov 24 '20 at 15:34
  • $\begingroup$ Would you be able to recommend me a method that can be applied relatively quickly? I have thought about it until now to determine it for financial ratios. But then I backed off because I was missing a lot of historical data and I didn't have easy access to it. $\endgroup$ – Dennis Khavkin Nov 24 '20 at 15:42
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    $\begingroup$ You can try reprorucing Ed Altman's original paper. It still needs a lot of data, but less than a full-blown IFR9 implementation. If the goal is to implement something that an institution has to run in production, then you need all the regulatory requirements' bells and whistles. But if it's just a clasroom exercise, then you may be allowed to just make up test data. $\endgroup$ – Dimitri Vulis Nov 24 '20 at 15:57
  • $\begingroup$ first of all thank you for your quick answers! you help a lot! in your opinion is it a valid method to determine the pd from a CDS? $\endgroup$ – Dennis Khavkin Nov 24 '20 at 19:45
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    $\begingroup$ There are no observable CDS spreads for most names out there. If you do have a CDS quote, then you can assume the LGD (traditionally 40% recovery for corporates) and solve for risk-neutral PD. Also instead of CDS spread, you can try using bonds' Z-spread. But all this may not satisfy your regulatory requirements if you're required to use history and fundamentals to estimate physical LGD and PD. $\endgroup$ – Dimitri Vulis Nov 24 '20 at 20:37

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