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Macroeconomic Dynamics and Credit Risk: A Global Perspective

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Author Info
Pesaran, M.H.
Schuermann, T.
Treutler, B-J.
Weiner, S.M.

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Abstract

We develop a framework for modelling conditional loss distributions through the introduction of risk factor dynamics. Asset value changes of a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks. Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and foreign, and how business cycles are linked across countries. The model is able to control for firm-specific heterogeneity as well as generate multi-period forecasts of the entire loss distribution, conditional on specific macroeconomic scenarios.

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Publisher Info
Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0330.

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Length: 67
Date of creation: Jun 2003
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Handle: RePEc:cam:camdae:0330

Note: EM, Ma
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Related research
Keywords: risk management; economic interlinkages; loss forecasting; default correlation;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
G20 - Financial Economics - - Financial Institutions and Services - - - General

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