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Generalized Impulse Responses of Portfolio Default Probabilities: A Modular Framework with an Application to Geopolitical Risk

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  • Guillaume Flament
  • Christophe Hurlin
  • Quentin Lajaunie
  • Yoann Pull

Abstract

Credit stress testing requires impulse responses of portfolio default probabilities, not only macro-financial drivers. We derive closed-form generalized impulse responses for the mean, quantiles (PD-at-Risk), and expected shortfall in a modular framework combining a Bayesian VAR, a Gaussian satellite, and the Merton-Vasicek model underlying Basel IRB regulation. Results extend to any probit-Gaussian mapping of a latent factor. Nonlinearity makes responses depend on conditional means and variances; plug-in evaluations understate projected default probability levels by 6-8% and miss tail quantiles. For U.S. geopolitical risk shocks, 99%-quantile responses exceed mean responses by 50%, and peak responses vary 4.6-fold across the credit cycle.

Suggested Citation

  • Guillaume Flament & Christophe Hurlin & Quentin Lajaunie & Yoann Pull, 2026. "Generalized Impulse Responses of Portfolio Default Probabilities: A Modular Framework with an Application to Geopolitical Risk," Papers 2608.04469, arXiv.org.
    • Handle: RePEc:arx:papers:2608.04469
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    File URL: https://arxiv.org/pdf/2608.04469
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