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Default risk: Poisson mixture and the business cycle

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Author Info
Chiara Pederzoli ()
Abstract

As emphasized by the introduction of Basel II, the macroeconomic factors strongly affect credit risk variables. In order to account for the business cycle in a forward-looking way, a macroeconomic forecast can be introduced in the estimation of credit risk variables. This work proposes to model the distribution of the default rate as a mixture distribution which accounts for a binary representation of the business cycle: the distribution changes according to the estimated probability of recession over the credit horizon considered.

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Publisher Info
Paper provided by Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi" in its series Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) with number 07052.

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Length: pages 14
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:mod:wcefin:07052

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Web page: http://www.economia.unimore.it
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Related research
Keywords: default risk; Poisson mixture; business cycle;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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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. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, 07. [Downloadable!] (restricted)
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  3. 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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  4. 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)
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  5. 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)
  6. Sensier, Marianne & Artis, Michael & Osborn, Denise R. & Birchenhall, Chris, 2004. "Domestic and international influences on business cycle regimes in Europe," International Journal of Forecasting, Elsevier, vol. 20(2), pages 343-357. [Downloadable!] (restricted)
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  7. 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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  8. Giuseppe Marotta & Chiara Pederzoli & Costanza Torricelli, 2005. "Forward-looking estimation of default probabilities with Italian data," Heterogeneity and monetary policy 0504, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica. [Downloadable!]
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