Reference date = 10 months (red line)

In the estimation relevant for the reference date t=20 months in default observations A, B and C are clearly included. Although observation D is in default for longer than 20 months, it is not included in the sample because the observations of costs and recoveries at the next reference date (here t=30 months) are not yet available. However, if observation D had been closed 24 months after default, this observation would be included in the calculation of the long-run average LGD relevant for the reference date t=20 months in default.

In this case only observation A is used. In all other observations the cash flows beyond the reference date t=50 months are not yet known, so these observations do not carry any additional information which could be used to estimate the expected loss relevant for the reference date t=50 days in default.

Figure 5: Example for observations taken into account at the reference date = 20 months