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Macroeconomic Dynamics and Credit Risk: A Global Perspective

  • Pesaran, M.H.
  • Schuermann, T.
  • Treutler, B-J.
  • Weiner, S.M.

We develop a framework for modelling conditional loss distributions through the introduction of risk factor dynamics. Asset value changes of a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks. Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and foreign, and how business cycles are linked across countries. The model is able to control for firm-specific heterogeneity as well as generate multi-period forecasts of the entire loss distribution, conditional on specific macroeconomic scenarios.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0330.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0330.

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Length: 67
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:cam:camdae:0330
Note: EM, Ma
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  24. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
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  39. Pesaran, H. & Smith, R. & Im, K.S., 1995. "Dynamic Linear Models for Heterogeneous Panels," Cambridge Working Papers in Economics 9503, Faculty of Economics, University of Cambridge.
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