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.
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