Measurement of Household Financial Risk with the Survey of Household Finances
In this paper we study the determinants of financial risk of households. We estimate the probability of default of household using a probit model with two novel variables: (i) a Modified version of the Debt Service Ratio index (MDSR) and (ii) the probability of job layoff of the head of the household. Our new index allows us to include households without any transitory income in the analysis and solve the outliers’ problem underlying the standard Debt Service Ratio (DSR). The probability of layoff allows us to incorporate the uncertainty with respect to the labor status and income of the household’s head. In addition, we study the marginal probability of default for different income strata and age strata by levels of MDSR, conditional in others characteristics. We use micro-data from the Survey of Household Finances (SHF) of the Central Bank of Chile. Our estimates show that both, the MDSR and the probability of job layoff, are positively related with the probability of default. In fact, we found a monotonically increasing relationship between the probability of default and the MDSR. Our results allow us to assess the probability of default of the debt outstanding, and to project it under different scenarios.
|Date of creation:||Feb 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Casilla No967, Santiago|
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shubhasis Dey & Ramdane Djoudad & Yaz Terajima, 2008. "A Tool for Assessing Financial Vulnerabilities in the Household Sector," Bank of Canada Review, Bank of Canada, vol. 2008(Summer), pages 47-56.
- Orla May & Merxe Tudela, 2005. "When is mortgage indebtedness a financial burden to British households? A dynamic probit approach," Bank of England working papers 277, Bank of England.
- BÃ¶heim, RenÃ© & Taylor, Mark P., 2000.
"My home was my castle: evictions and repossessions in Britain,"
ISER Working Paper Series
2000-04, Institute for Social and Economic Research.
- Boheim, Rene & Taylor, Mark P., 2000. "My Home Was My Castle: Evictions and Repossessions in Britain," Journal of Housing Economics, Elsevier, vol. 9(4), pages 287-319, December.
- Ingrid Jones & Alberto Naudon, 2009. "Dinámica Laboral y Evolución del Desempleo en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(3), pages 79-87, December.
- Georgarakos, Dimitris & Lojschova, Adriana & Ward-Warmedinger, Melanie E., 2009.
"Mortgage Indebtedness and Household Financial Distress,"
IZA Discussion Papers
4631, Institute for the Study of Labor (IZA).
- Georgarakos, Dimitris & Lojschová, Adriana & Ward-Warmedinger, Melanie, 2010. "Mortgage indebtedness and household financial distress," Working Paper Series 1156, European Central Bank.
- DeVaney, Sharon A. & Lytton, Ruth H., 1995. "Household insolvency: A review of household debt repayment, delinquency, and bankruptcy," Financial Services Review, Elsevier, vol. 4(2), pages 137-156.
- Rodrigo Alfaro & Natalia Gallardo & Roberto Stein, 2010. "The Determinants of Household Debt Defa," Working Papers Central Bank of Chile 574, Central Bank of Chile.
- Herrala, Risto & Kauko, Karlo, 2007. "Household loan loss risk in Finland – estimations and simulations with micro data," Research Discussion Papers 5/2007, .
- Greninger, Sue A. & Hampton, Vickie L. & Kitt, Karrol A. & Achacoso, Joseph A., 1996. "Ratios and benchmarks for measuring the financial well-being of families and individuals," Financial Services Review, Elsevier, vol. 5(1), pages 57-70.
- Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
- Robert Shimer, 2012.
"Reassessing the Ins and Outs of Unemployment,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
- Robert Shimer, 2008. "The Probability of Finding a Job," American Economic Review, American Economic Association, vol. 98(2), pages 268-73, May.
- Umar Faruqui, 2008. "Indebtedness and the Household Financial Health: An Examination of the Canadian Debt Service Ratio Distribution," Staff Working Papers 08-46, Bank of Canada.
- Guonan Ma & Eli Remolona & Ilhyock Shim, 2009. "Introduction for "Household debt: implications for monetary policy and financial stability"," BIS Papers chapters, in: Bank for International Settlements (ed.), Household debt: implications for monetary policy and financial stability, volume 46, pages 1-3 Bank for International Settlements.
When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:682. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)
If references are entirely missing, you can add them using this form.