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Modeling Default Probabilities: the case of Brazil

  • Benjamin M. Tabak
  • Daniel O. Cajueiro
  • A. Luduvice

Using disaggregated data from the Brazilian stock market, we calculate default probabilities for 30 different economic sectors. Empirical results suggest that domestic macroeconomic factors can explain these default probabilities. In addition, we construct the Minimum Spanning Tree (MST) and the ultrametric hierarchical tree with the MST based on default probabilities to disclose common trends, which reveals that some sectors form clusters. The results of this paper imply that macroeconomic variables have distinct effects on default probabilities, which is important to take into account in credit risk modeling and the generation of stress test scenarios.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps232.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 232.

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Date of creation: Jan 2011
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Handle: RePEc:bcb:wpaper:232
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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