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Modeling default probabilities: The case of Brazil

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Author Info

  • Tabak, Benjamin M.
  • Luduvice, André Victor D.
  • Cajueiro, Daniel O.

Abstract

Using disaggregated data from the Brazilian stock market, we calculate default probabilities for 30 different economic sectors. Empirical results suggest that domestic macroeconomic factors can explain these default probabilities. In addition, we construct the Minimum Spanning Tree (MST) and the ultrametric hierarchical tree with the MST based on default probabilities to disclose common trends, which reveals that some sectors form clusters. The results of this paper imply that macroeconomic variables have distinct effects on default probabilities, which is important to take into account in credit risk modeling and the generation of stress test scenarios.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 21 (2011)
Issue (Month): 4 (October)
Pages: 513-534

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Handle: RePEc:eee:intfin:v:21:y:2011:i:4:p:513-534

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Web page: http://www.elsevier.com/locate/intfin

Related research

Keywords: Probabilities of default Default risk Capital Asset Pricing Model (CAPM) Minimal Spanning Tree (MST);

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Citations

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Cited by:
  1. Barros, Carlos Pestana & Wanke, Peter, 2014. "Banking efficiency in Brazil," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 54-65.
  2. Benjamin M. Tabak & Marcelo Yoshio Takami & J. M. C. Rocha & Daniel O. Cajueiro, 2011. "Directed Clustering Coefficient as a Measure of Systemic Risk in Complex Banking Networks," Working Papers Series 249, Central Bank of Brazil, Research Department.
  3. Azusa Takeyama & Nick Constantinou & Dmitri Vinogradov, 2012. "A Framework for Extracting the Probability of Default from Stock Option Prices," IMES Discussion Paper Series 12-E-14, Institute for Monetary and Economic Studies, Bank of Japan.

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