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Correlations and Business Cycles of Credit Risk: Evidence from Bankruptcies in Germany

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  • Rösch, Daniel

Abstract

A major topic in empirical finance is correlation of default risk. Correlations are the main drivers for credit risk on a portfolio basis and for banks� capital requirements under the New Basel Accord. However, empirical evidence on the magnitude of correlations is rather scarce, mainly due to data limitations. Using a large database of bankruptcies in Germany we estimate correlations using a simple version of the Basel II factor model. Then we extend the model to an approach with observable risk factors and suggest that this model with default probabilities depending on the state of the economy may be more adequate. Empirical evidence on proxies for the credit cycles is presented for German industry sectors. We find that much of the co-movements can be explained by our variables. Finally, we discuss some implications for forecasts of distributions of potential future defaults of a bank�s portfolio. Ein wichtiges Gebiet im Bereich der empirischen Finanzwirtschaft stellen Korrelationen von Kreditausfällen dar. Sowohl in Kreditportfoliomodellen als auch für die Eigenkapitalanforderungen von Banken im Neuen Basler Akkord sind sie die Haupttreiber von Kreditrisiken. Allerdings sind empirische Ergebnisse über die Größenordnungen von Korrelationen hauptsächlich aufgrund unzureichender Datenlage bislang äußerst selten zu finden. Der vorliegende Beitrag schätzt zunächst mit Hilfe einer einfachen statischen Version des Basel II Faktormodells Ausfallwahrscheinlichkeiten und Korrelationen anhand einer großen Datenbank deutscher Unternehmen. Das einfache Modell wird anschließend um beobachtbare makroökonomische Risikofaktoren erweitert und die Ausfallwahrscheinlichkeiten werden in Abhängigkeit des aktuellen Stands der Konjunktur modelliert. Es stellt sich heraus, dass ein großer Teil der im einfachen Modell vorhandenen Korrelationen durch die Risikofaktoren erklärt werden kann. Schließlich werden für die jeweiligen Modelle Implikationen für Verlustprognosen von Bankenportfolien aufgezeigt.

Suggested Citation

  • Rösch, Daniel, 2003. "Correlations and Business Cycles of Credit Risk: Evidence from Bankruptcies in Germany," University of Regensburg Working Papers in Business, Economics and Management Information Systems 380, University of Regensburg, Department of Economics.
  • Handle: RePEc:bay:rdwiwi:483
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    Cited by:

    1. Gürtler, Marc & Heithecker, Dirk, 2005. "Multi-period defaults and maturity effects on economic capital in a ratings-based default-mode model," Working Papers FW19V2, Technische Universität Braunschweig, Institute of Finance.
    2. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    3. Hamerle, Alfred & Knapp, Michael & Wildenauer, Nicole, 2005. "Auswirkungen unterschiedlicher Assetkorrelationen in Mehr-Sektoren-Kreditportfoliomodellen," University of Regensburg Working Papers in Business, Economics and Management Information Systems 409, University of Regensburg, Department of Economics.
    4. Düllmann, Klaus & Kunisch, Michael & Küll, Jonathan, 2008. "Estimating asset correlations from stock prices or default rates: which method is superior?," Discussion Paper Series 2: Banking and Financial Studies 2008,04, Deutsche Bundesbank.
    5. Correa, Arnildo & Marins, Jaqueline & Neves, Myrian & da Silva, Antonio Carlos, 2014. "Credit Default and Business Cycles: An Empirical Investigation of Brazilian Retail Loans," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(3), September.
    6. Aisyah Rahman, 2010. "Financing structure and insolvency risk exposure of Islamic banks," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(4), pages 419-440, December.
    7. Marius Hofert & Matthias Scherer & Rudi Zagst, 2010. "Modeling the evolution of implied CDO correlations," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(3), pages 289-308, September.
    8. Lutz Hahnenstein, 2004. "Calibrating the CreditMetrics™ correlation concept — Empirical evidence from Germany," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 18(4), pages 358-381, December.
    9. Feng, D. & Gourieroux, C. & Jasiak, J., 2008. "The ordered qualitative model for credit rating transitions," Journal of Empirical Finance, Elsevier, vol. 15(1), pages 111-130, January.
    10. Gabriel Illanes & Alejandro Pena & Andrés Sosa, 2014. "Un Modelo Macroeconómico del Riesgo de Crédito en Uruguay," Documentos de trabajo 2014002, Banco Central del Uruguay.
    11. J. Crook & T. Bellotti, 2012. "Asset correlations for credit card defaults," Applied Financial Economics, Taylor & Francis Journals, vol. 22(2), pages 87-95, January.
    12. repec:fgv:epgrbe:v:68:n:3:a:3 is not listed on IDEAS

    More about this item

    Keywords

    Kreditrisiko; ; Credit risk dependencies ; credit risk models;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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