Modeling the distribution of credit losses with observable and latent factors
AbstractThis paper develops a flexible and computationally efficient model to estimate the credit loss distribution of the loans in a banking system. We consider a sectorial structure, where default frequencies and the total number of loans are allowed to depend on macroeconomic conditions as well as on unobservable credit risk factors, which can capture contagion effects between sectors. In addition, we also model the distributions of the Exposure at Default and the Loss Given Default. We apply our model to the Spanish credit market, where we find that sectorial default frequencies are affected by a persistent latent factor. Finally, we also identify the potentially riskier sectors and perform stress tests.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0709.
Length: 49 pages
Date of creation: Apr 2007
Date of revision:
credit risk; probability of default; loss distribution; stress test; contagion;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-28 (All new papers)
- NEP-BAN-2007-04-28 (Banking)
- NEP-ECM-2007-04-28 (Econometrics)
- NEP-MAC-2007-04-28 (Macroeconomics)
- NEP-RMG-2007-04-28 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & M. Hashem Pesaran, 2003.
"Macroeconomic Dynamics and Credit Risk: A Global Perspective,"
CESifo Working Paper Series
995, CESifo Group Munich.
- Pesaran, M. Hashem & Schuermann, Til & Treutler, Bjorn-Jakob & Weiner, Scott M., 2006. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1211-1261, August.
- M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & April, . "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Center for Financial Institutions Working Papers 03-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Pesaran, M.H. & Schuermann, T. & Treutler, B-J. & Weiner, S.M., 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Cambridge Working Papers in Economics 0330, Faculty of Economics, University of Cambridge.
- Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
- Gabriel Jiménez & Jose A. Lopez & Jesus Saurina, 2009.
"Empirical Analysis of Corporate Credit Lines,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(12), pages 5069-5098, December.
- Gabriel Jiménez & José A. López & Jesús Saurina, 2008. "Empirical analysis of corporate credit lines," Banco de Espaï¿½a Working Papers 0821, Banco de Espa�a.
- Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2007. "Empirical analysis of corporate credit lines," Working Paper Series 2007-14, Federal Reserve Bank of San Francisco.
- Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
- Martin Summer & Helmut Elsinger & Alfred Lehar, 2002.
"Risk Assessment for Banking Systems,"
79, Oesterreichische Nationalbank (Austrian Central Bank).
- Joshua V. Rosenberg & Til Schuermann, 2004.
"A general approach to integrated risk management with skewed, fat-tailed risks,"
185, Federal Reserve Bank of New York.
- Rosenberg, Joshua V. & Schuermann, Til, 2006. "A general approach to integrated risk management with skewed, fat-tailed risks," Journal of Financial Economics, Elsevier, vol. 79(3), pages 569-614, March.
- Virolainen , Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers 18/2004, Bank of Finland.
- Bruche, Max & González-Aguado, Carlos, 2010.
"Recovery rates, default probabilities, and the credit cycle,"
Journal of Banking & Finance,
Elsevier, vol. 34(4), pages 754-764, April.
- Max Bruche & Carlos González Aguado, 2006. "Recovery Rates, Default Probabilities And The Credit Cycle," Working Papers wp2006_0612, CEMFI.
- Carlos González-Aguado & Max Bruche, 2006. "Recovery Rates, Default Probabilities and the Credit Cycle," FMG Discussion Papers dp572, Financial Markets Group.
- Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2005.
"A test of the law of one price in retail banking,"
Banco de Espaï¿½a Working Papers
0530, Banco de Espa�a.
- Russell Davidson & James G. MacKinnon, 1985. "Testing Linear and Loglinear Regressions against Box-Cox Alternatives," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 499-517, August.
- Til Schuermann & Kevin J. Stiroh, 2006. "Visible and hidden risk factors for banks," Staff Reports 252, Federal Reserve Bank of New York.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mar�a Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de Espa�a).
If references are entirely missing, you can add them using this form.