Aggregate Bankruptcy Rates and the Macroeconomic Environment. Forecasting Systematic Probabilities of Default
Recent empirical research has stressed the importance of economy wide factors in the assessment of default risk, for instance for bond portfolios or portfolios of bank loans. Macroeconomic risk is essentially systematic, as it is difficult to reduce through diversification. Adequate forecasts of the links between macroeconomic factors and default risk, often defined as aggregate credit risk, are therefore important in a large number of risk management applications. This paper considers eleven alternative ways to model the aggregate bankruptcy rate, which is a proxy for aggregate credit risk, on Belgian data for the period 1986- 2002. Based on these models, forecasts of the bankruptcy rates for 2003-2006 are made and compared. Four or five-variable Almon lag models result in the best in-sample fit and have the best forecast performance, but much more straightforward alternatives – such as an ARMA model or a one-variable model based on real GDP growth – do almost equally well. Four or five-variable vector error correction models are shown to have good in-sample fit, but very poor out-of-sample forecasting power. Overall we find that the prediction power of simple models is hard to beat.
Volume (Year): LII (2007)
Issue (Month): 4 ()
|Contact details of provider:|| Postal: |
Web page: http://www.econ.kuleuven.be
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ete:revbec:20070402. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hilde Roos)The email address of this maintainer does not seem to be valid anymore. Please ask Hilde Roos to update the entry or send us the correct address
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.