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

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  • Rösch, Daniel
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    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.

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    Paper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 380.

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    Date of creation: 2003
    Handle: RePEc:bay:rdwiwi:483
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