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Global Business Cycles and Credit Risk

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  • M. Hashem Pesaran
  • Til Schuermann
  • Björn-Jakob Treutler

Abstract

The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11493.

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Date of creation: Jul 2005
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Publication status: published as Global Business Cycles and Credit Risk , M. Hashem Pesaran, Til Schuermann, Bjorn-Jakob Treutler. in The Risks of Financial Institutions , Carey and Stulz. 2006
Handle: RePEc:nbr:nberwo:11493

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Cited by:
  1. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series, European Central Bank 1151, European Central Bank.
  2. Chudik, Alexander & Pesaran, Hashem, 2009. "Infinite-dimensional VARs and factor models," Working Paper Series, European Central Bank 0998, European Central Bank.
  3. Renzo G. Avesani & Jing Li & Antonio Garcia Pascual, 2006. "A New Risk Indicator and Stress Testing tool," IMF Working Papers, International Monetary Fund 06/105, International Monetary Fund.
  4. Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2009. "How to find plausible, severe, and useful stress scenarios," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 150, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Pesaran, M.H. & Smith, R., 2006. "Macroeconometric Modelling with a Global Perspective," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0604, Faculty of Economics, University of Cambridge.
  6. Alexander Chudik & Marcel Fratzscher, 2012. "Liquidity, risk and the global transmission of the 2007–08 financial crisis and the 2010–11 sovereign debt crisis title," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 107, Federal Reserve Bank of Dallas.
  7. Bussière, Matthieu & Chudik, Alexander & Sestieri, Giulia, 2009. "Modelling global trade flows: results from a GVAR model," Working Paper Series, European Central Bank 1087, European Central Bank.
  8. Chudik, Alexander & Fratzscher, Marcel, 2012. "Liquidity, risk and the global transmission of the 2007-08 financial crisis and the 2010-2011 sovereign debt crisis," Working Paper Series, European Central Bank 1416, European Central Bank.
  9. Breuer, Thomas & Jandacka, Martin & Rheinberger, Klaus & Summer, Martin, 2010. "Does adding up of economic capital for market- and credit risk amount to conservative risk assessment?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(4), pages 703-712, April.
  10. Chudik, Alexander & Fratzscher, Marcel, 2011. "Identifying the global transmission of the 2007-09 financial crisis in a GVAR Model," Working Paper Series, European Central Bank 1285, European Central Bank.
  11. Breuer, Thomas & Jandacka, Martin & Rheinberger, Klaus & Summer, Martin, 2008. "Regulatory capital for market and credit risk interaction: is current regulation always conservative?," Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank, Research Centre 2008,14, Deutsche Bundesbank, Research Centre.
  12. Chudik, Alexander & Fratzscher, Marcel, 2011. "Identifying the global transmission of the 2007-2009 financial crisis in a GVAR model," European Economic Review, Elsevier, Elsevier, vol. 55(3), pages 325-339, April.
  13. Carling, Kenneth & Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2007. "Corporate credit risk modeling and the macroeconomy," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(3), pages 845-868, March.
  14. Annari de Waal & Renee van Eyden, 2013. "The impact of economic shocks in the rest of the world on South Africa: Evidence from a global VAR," Working Papers, University of Pretoria, Department of Economics 201328, University of Pretoria, Department of Economics.

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