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Probability of default in collateralized credit operations

Listed author(s):
  • Divino, Jose Angelo
  • Rocha, Líneke Clementino Sleegers

The goal of this paper is to identify the major determinants of the probability of default in a mortgage credit operation, which is backed by collateral. We use an exclusive data set with 268,036 loan contracts and apply logistic regression and Cox proportional hazards model in the estimation. The discriminatory power of the estimated models is analyzed by several accuracy indicators. The inclusion of time-dependent macroeconomic variables in addition to covariates representing characteristics of the contract and individuals improved the overall performance. Logistic regression showed a higher discriminatory power than Cox proportional hazards model according to all accuracy indicators. It is worth mentioning the negative relationship between the probability of default and the economy base interest rate. Decreases in the base interest rate lead banks to lose revenue from treasury operations and expand credit operations to compensate the loss. This strategy brings individuals with a higher probability of default to the financial market.

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File URL: http://www.sciencedirect.com/science/article/pii/S1062940812000666
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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 25 (2013)
Issue (Month): C ()
Pages: 276-292

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Handle: RePEc:eee:ecofin:v:25:y:2013:i:c:p:276-292
DOI: 10.1016/j.najef.2012.06.015
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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  1. Veronica Balzarotti & Michael Falkenheim & Andrew Powell, 2002. "On the Use of Portfolio Risk Models and Capital Requirements in Emerging Markets: The Case of Argentina," World Bank Economic Review, World Bank Group, vol. 16(2), pages 197-212, August.
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  6. Gary Whalen, 1991. "A proportional hazards model of bank failure: an examination of its usefulness as an early warning tool," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 21-31.
  7. anonymous, 2008. "Monetary policy report to the Congress," Web Site 34, Board of Governors of the Federal Reserve System (U.S.).
  8. John Geanakoplos, 2010. "The Leverage Cycle," NBER Chapters,in: NBER Macroeconomics Annual 2009, Volume 24, pages 1-65 National Bureau of Economic Research, Inc.
  9. Jonathan Crook & Tony Bellotti, 2010. "Time varying and dynamic models for default risk in consumer loans," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(2), pages 283-305.
  10. Jose Angelo Divino & Edna Souza Lima & Jaime Orrillo, 2013. "Interest rates and default in unsecured loan markets," Quantitative Finance, Taylor & Francis Journals, vol. 13(12), pages 1925-1934, December.
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