Global Macro-Financial Shocks and expected default frequencies in the Euro area

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Global Macro-Financial Shocks and expected default frequencies in the Euro area

Author Info

Olli Castrén () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Stéphane Dées () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Fadi Zaher () (Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom.)

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Abstract

Modelling the link between the global macro-financial factors and firms’ default probabilities constitutes an elementary part of financial sector stress-testing frameworks. Using the Global Vector Autoregressive (GVAR) model and constructing a linking satellite equation for the firm-level Expected Default Frequencies (EDFs), we show how to analyse the euro area corporate sector probability of default under a wide range of domestic and foreign macroeconomic shocks. The results show that, at the euro area aggregate level, the median EDFs react most to shocks to the GDP, exchange rate, oil prices and equity prices. There are some intuitive variations to these results when sector-level EDFs are considered. Overall, the Satellite-GVAR model appears to be a useful tool for analysing plausible global macrofinancial shock scenarios designed for financial sector stress-testing purposes. JEL Classification: C33, F47, G32, G33.

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Paper provided by European Central Bank in its series Working Paper Series with number 875.

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Length: 44 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:ecb:ecbwps:20080875

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This paper has been announced in the following NEP Reports:

NEP-ALL-2008-03-08 (All new papers)
NEP-BEC-2008-03-08 (Business Economics)
NEP-CBA-2008-03-08 (Central Banking)
NEP-EEC-2008-03-08 (European Economics)
NEP-MAC-2008-03-08 (Macroeconomics)
NEP-OPM-2008-03-08 (Open MacroEconomics)

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