This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Business and Default Cycles for Credit Risk

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Siem Jan Koopman () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
André Lucas () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

Additional information is available for the following registered author(s):

Abstract

Various economic theories are available to explain the existence of credit and default cycles. There remains empirical ambiguity, however, as to whether or these cycles coincide. Recent papers suggest by their empirical research set-up that they do, or at least that defaults and credit spreads tend to co-move with macro-economic variables. If true, this is important for credit risk management as well as for regulation and systemic risk management. In this paper, we use 1927-1997 U.S. data on real GDP, credit spreads, and business failure rates to shed new light on the empirical evidence. We use a multivariate unobserved components framework to disentangle credit from business cycles. It turns out that cyclical co-movements arise between default rates, but not real GDP. There is, however, a contemporaneous correlation between real GDP and default rates. Regarding the longer term evolution of the series, credit spreads influence default rates and real GDP, but not vice versa. This corroborates some of the empirical findings in the recent literature on the correlation between macrovariables and default rates. It also suggests the use of credit spreads besides or instead of economic growth rates to forecast the dynamics of future default rates.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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.

File URL: http://www.tinbergen.nl/discussionpapers/03062.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-062/2.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 29 Jul 2003
Date of revision: 09 Jan 2003
Handle: RePEc:dgr:uvatin:20030062

Contact details of provider:
Web page: http://www.tinbergen.nl/

For technical questions regarding this item, or to correct its listing, contact: (Walther Schoonenberg).

Related research
Keywords: credit cycles; business cycles; defaults; credit risk; procyclicality; multivariate unobserved component models.;

Other versions of this item:

Find related papers by JEL classification:
C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Other
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.:
  1. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June. [Downloadable!] (restricted)
  2. Til Schuermann & Bjoern-Jakob Treutler & Scott M. Weiner & M. Hashem Pesaran, 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02. [Downloadable!] (restricted)
  4. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept. [Downloadable!] (restricted)
  5. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  6. Lucas, Andre & Klaassen, Pieter & Spreij, Peter & Straetmans, Stefan, 2001. "An analytic approach to credit risk of large corporate bond and loan portfolios," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1635-1664, September. [Downloadable!] (restricted)
    Other versions:
  7. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  8. Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements. [Downloadable!]
  9. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
    Other versions:
  10. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  11. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 687-720.
  12. Robert A. Jarrow & David Lando & Fan Yu, 2005. "Default Risk And Diversification: Theory And Empirical Implications," Mathematical Finance, Blackwell Publishing, vol. 15(1), pages 1-26. [Downloadable!] (restricted)
  13. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 481-523.
  14. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January. [Downloadable!] (restricted)
    Other versions:
  15. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  16. C. H. Furfine & Jeffery D. Amato, 2003. "Are credit ratings procyclical?," BIS Working Papers 129, Bank for International Settlements. [Downloadable!]
  17. Guha, Debashis & Hiris, Lorene, 2002. "The aggregate credit spread and the business cycle," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 219-227. [Downloadable!] (restricted)
  18. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December. [Downloadable!] (restricted)
  19. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November. [Downloadable!] (restricted)
  20. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March. [Downloadable!] (restricted)
  21. Laeven, Luc & Majnoni, Giovanni, 2001. "Loan loss provisioning and economic slowdowns : too much, too late?," Policy Research Working Paper Series 2749, The World Bank. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, 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.)

  1. Florian Heiss, 2008. "Sequential numerical integration in nonlinear state space models for microeconometric panel data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(3), pages 373-389. [Downloadable!]
  2. Petr Jakubík, 2007. "Credit Risk and the Finnish Economy," AUCO Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(3), pages 254-285, November. [Downloadable!]
  3. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer, vol. 26(2), pages 161-191, October. [Downloadable!] (restricted)
  4. Siem Jan Koopman & André Lucas & Robert Daniels, 2005. "A Non-Gaussian Panel Time Series Model for Estimating and Decomposing Default Risk," Tinbergen Institute Discussion Papers 05-060/4, Tinbergen Institute. [Downloadable!]
    Other versions:
  5. Chew Lian Chua & G. C. Lim & Penelope Smith, 2008. "A Bayesian Simulation Approach to Inference on a Multi-State Latent Factor Intensity Model," Melbourne Institute Working Paper Series wp2008n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  6. Gatfaoui Hayette, 2004. "Idiosyncratic Risk, Systematic Risk and Stochastic Volatility: An Implementation of Merton’s Credit Risk Valuation," Finance 0404004, EconWPA. [Downloadable!]
  7. cipollini, andrea & missaglia, giuseppe, 2007. "Dynamic Factor analysis of industry sector default rates and implication for Portfolio Credit Risk Modelling," MPRA Paper 3582, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  8. Petr JAKUBÍK, 2007. "Macroeconomic Environment and Credit Risk (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 60-78, March. [Downloadable!]
  9. Georges Dionne & Pascal François & Olfa Maalaoui, 2009. "Detecting Regime Shifts in Corporate Credit Spreads," Cahiers de recherche 0929, CIRPEE. [Downloadable!]
  10. Olfa Maalaoui & Georges Dionne & Pascal François, 2009. "Credit Spread Changes within Switching Regimes," Cahiers de recherche 0905, CIRPEE. [Downloadable!]
  11. Bruneau, C. & De Bandt, O., 2008. "Macroeconomic Fluctuations and Corporate Financial Fragility," Documents de Travail 226, Banque de France. [Downloadable!]
  12. Siem Jan Koopman & Roman Kraeussl & Andre Lucas & Andre Monteiro, 2006. "Credit Cycles and Macro Fundamentals," Tinbergen Institute Discussion Papers 06-023/2, Tinbergen Institute. [Downloadable!]
    Other versions:
  13. Roland Meeks, 2006. "Credit Shocks and Cycles: a Bayesian Calibration Approach," Economics Papers 2006-W11, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  14. Dietske Simons & Ferdinand Rolwes, 2009. "Macroeconomic efault Modeling and Stress Testing," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 177-204, September. [Downloadable!]
  15. Hayette Gatfaoui, 2004. "Idiosyncratic Risk, Systematic Risk and Stochastic Volatility: An Implementation of Merton's Credit Risk Valuation," Research Paper Series 123, Quantitative Finance Research Centre, University of Technology, Sydney.
  16. Diana Barro & Antonella Basso, 2008. "Credit contagion in a network of firms with spatial interaction," Working Papers 186, Department of Applied Mathematics, University of Venice. [Downloadable!]
Statistics
Access and download statistics

Did you know? You too can volunteer for RePEc, for example by encouraging others to use our services.

This page was last updated on 2009-11-19.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.