Forward-looking estimation of default probabilities with Italian data

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Forward-looking estimation of default probabilities with Italian data

Author Info

Giuseppe Marotta ()
Chiara Pederzoli ()
Costanza Torricelli ()

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Abstract

The solution adopted in Basel II to deal with procyclicality of capital requirements (i.e. through the cycle ratings and long-run average estimates of default probabilities) implies a reduction in the risk-sensitivity that contradicts the original spirit of the new framework.In order to preserve risk-sensitivity and to dampen procyclicality at the same time, Pederzoli and Torricelli (2005) set up a model which relies on a business cycle forecast in the estimation of the default probability and provide an application for the US. The modelling approach hinges on a forward-looking definition of capital requirements, in anticipation of the business cycle with a possible smoothing effect on the business cycle turning points.The present paper checks the robustness of the approach for the Italian case, where alternative business cycles chronologies are used and ratings have to be approximated by exploiting default data provided by the Bank of Italy. Findings suggest that the comparison between the alternative chronologies is an important issue.

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Publisher Info
Paper provided by Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica in its series Heterogeneity and monetary policy with number 0504.

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Length: pages 18
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:mod:modena:0504

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-04-30 (All new papers)
NEP-FIN-2005-04-30 (Finance)
NEP-MAC-2005-04-30 (Macroeconomics)

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.:

Arturo Estrella & Frederic S. Mishkin, 1999. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Other versions:
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Pederzoli, Chiara & Torricelli, Costanza, 2005. "Capital requirements and business cycle regimes: Forward-looking modelling of default probabilities," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3121-3140, December. [Downloadable!] (restricted)
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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:
- Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March. [Downloadable!] (restricted)
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Other versions:
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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.)

Costanza Torricelli & Marianna Brunetti, 2006. "Economic activity and Recession Probabilities: spread predictive power in Italy," Computing in Economics and Finance 2006 350, Society for Computational Economics.
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!]
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:
- Andrea Cipollini & Giuseppe Missaglia, 2007. "Dynamic Factor analysis of industry sector default rates and implication for Portfolio Credit Risk Modelling," Center for Economic Research (RECent) 007, University of Modena and Reggio E., Dept. of Economics. [Downloadable!]
Chiara Pederzoli, 2007. "Default risk: Poisson mixture and the business cycle," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 07052, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi". [Downloadable!]

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