Åsberg Sommar, Per () (Financial Stability Department, Central Bank of Sweden) Shahnazarian, Hovick () (Financial Stability Department, Central Bank of Sweden)
Abstract
We use a vector error correction model to study the long-term relationship between aggregate expected default frequency and the macroeconomic development, i.e. CPI, industry production and short-term interest rate. The model is used to forecast the median expected default frequency of the corporate sector by conditioning on external forecasts of macroeconomic developments. Evaluations of the model show that it yields low forecast errors in terms of RMSE. The estimation results indicate that the interest rate has the strongest impact on expected default frequency among the included macroeconomic variables. The forecasts indicate that EDF will rise gradually over the forecast period.
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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number
219.
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