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Global macro-financial shocks and expected default frequencies in the euro area

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  • Castrén, Olli
  • Dées, Stéphane
  • Zaher, Fadi

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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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0875.

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Date of creation: Feb 2008
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Handle: RePEc:ecb:ecbwps:20080875

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Keywords: corporate default probability; Credit risk; Global VAR; macro stress testing;

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Cited by:
  1. Castrén, Olli & Fitzpatrick, Trevor & Sydow, Matthias, 2009. "Assessing portfolio credit risk changes in a sample of EU large and complex banking groups in reaction to macroeconomic shocks," Working Paper Series 1002, European Central Bank.
  2. Tao Sun, 2011. "Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-Financial Linkages Framework," IMF Working Papers 11/111, International Monetary Fund.
  3. Nguenang, Christian & Kamgna, Sévérin yves & Tinang, Nzeusseu Jules, 2010. "Une approche Macroprudentielle du risque systémique en zone CEMAC
    [A Macro-prudential approach of systemic risk in CEMAC zone]
    ," MPRA Paper 25632, University Library of Munich, Germany.
  4. Albert, Stéphane & Alexandre, Hervé, 2013. "Banks’ Earnings: an empirical evidence of the influence of economic and financial markets factors," Economics Papers from University Paris Dauphine 123456789/10353, Paris Dauphine University.
  5. Birmingham, Colin & Conefrey, Thomas, 2011. "The Irish Macroeconomic Response to an External Shock with an Application to Stress Testing," Research Technical Papers 10/RT/11, Central Bank of Ireland.
  6. Kovacs Ildiko & Karsai Zoltan-Krisztian & Suveg Orsolya & Joita Nicoleta, 2011. "The Relationship Between Macroeconomic Variables And Romanian Corporate Default Rates Between 2002-2008," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 206-213, July.

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