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Macroeconomic Dynamics and Credit Risk: A Global Perspective

  • Til Schuermann
  • Björn-Jakob Treutler
  • Scott M. Weiner
  • M. Hashem Pesaran

We develop a framework for modeling 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.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-07/cesifo_wp995.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 995.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_995
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  2. Gordon Gemmill, 2002. "Testing Merton's Model for Credit Spreads on Zero-Coupon Bonds," Working Papers wp02-08, Warwick Business School, Finance Group.
  3. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2002. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Center for Financial Institutions Working Papers 01-38, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  7. Seth B. Carpenter & William Whitesell & Egon Zakrajsek, 2001. "Capital requirements, business loans, and business cycles: an empirical analysis of the standardized approach in the new Basel Capital Accord," Finance and Economics Discussion Series 2001-48, Board of Governors of the Federal Reserve System (U.S.).
  8. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
  9. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge.
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  13. Garratt, A. & Lee, K. & Pesaran, M. H. & Shin, Y., 1998. "A Long-run Structural Macro-econometric Model of the UK," Cambridge Working Papers in Economics 9812, Faculty of Economics, University of Cambridge.
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  17. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
  18. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
  19. Jose A. Lopez & Marc R. Saidenberg, 1999. "Evaluating credit risk models," Working Papers in Applied Economic Theory 99-06, Federal Reserve Bank of San Francisco.
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  23. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
  24. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  25. Gurdip Bakshi & Dilip Madan & Frank Zhang, 2001. "Understanding the role of recovery in default risk models: empirical comparisons and implied recovery rates," Finance and Economics Discussion Series 2001-37, Board of Governors of the Federal Reserve System (U.S.).
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  27. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
  28. Haluk Unal & Dilip Madan & Levent Guntay, 2001. "A Simple Approach to Estimate Recovery Rates with APR Violation from Debt Spreads," Center for Financial Institutions Working Papers 01-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
  29. Mohammad Hashem Pesaran & Yongcheol Shin, 1999. "Long-Run Structural Modelling," ESE Discussion Papers 44, Edinburgh School of Economics, University of Edinburgh.
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  32. Til Schuermann & Yusuf Jafry, 2003. "Measurement and Estimation of Credit Migration Matrices," Center for Financial Institutions Working Papers 03-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
  33. C. H. Furfine & Jeffery D. Amato, 2003. "Are credit ratings procyclical?," BIS Working Papers 129, Bank for International Settlements.
  34. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
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  38. David Jones & John Mingo, 1998. "Industry practices in credit risk modeling and internal capital allocations: implications for a models-based regulatory capital standard," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 53-60.
  39. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  40. Mark Carey, 2002. "A guide to choosing absolute bank capital requirements," International Finance Discussion Papers 726, Board of Governors of the Federal Reserve System (U.S.).
  41. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
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