Default risk: Poisson mixture and the business cycle
AbstractAs 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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Bibliographic InfoPaper 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.
Length: pages 14
Date of creation: Jun 2007
Date of revision:
default risk; Poisson mixture; business cycle;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-23 (All new papers)
- NEP-BAN-2007-06-23 (Banking)
- NEP-BEC-2007-06-23 (Business Economics)
- NEP-MAC-2007-06-23 (Macroeconomics)
- NEP-RMG-2007-06-23 (Risk Management)
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