IDEAS home Printed from https://ideas.repec.org/p/chb/bcchwp/682.html

Measurement of Household Financial Risk with the Survey of Household Finances

Author

Listed:
  • Felipe Martínez
  • Rodrigo Cifuentes
  • Carlos Madeira
  • Rubén Poblete-Cazenave

Abstract

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.

Suggested Citation

  • Felipe Martínez & Rodrigo Cifuentes & Carlos Madeira & Rubén Poblete-Cazenave, 2013. "Measurement of Household Financial Risk with the Survey of Household Finances," Working Papers Central Bank of Chile 682, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:682
    as

    Download full text from publisher

    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_682.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Herrala, Risto & Kauko, Karlo, 2007. "Household loan loss risk in Finland: estimations and simulations with micro data," Bank of Finland Research Discussion Papers 5/2007, Bank of Finland.
    7. Ms. Meral Karasulu, 2008. "Stress Testing Household Debt in Korea," IMF Working Papers 2008/255, International Monetary Fund.
    8. Robert Shimer, 2008. "The Probability of Finding a Job," American Economic Review, American Economic Association, vol. 98(2), pages 268-273, May.
    9. 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.
    10. 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.
    11. Georgarakos, Dimitris & Lojschova, Adriana & Ward-Warmedinger, Melanie E., 2009. "Mortgage Indebtedness and Household Financial Distress," IZA Discussion Papers 4631, Institute of Labor Economics (IZA).
    12. 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.
    13. 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.
    14. Rodrigo Alfaro & Natalia Gallardo & Roberto Stein, 2010. "The Determinants of Household Debt Defa," Working Papers Central Bank of Chile 574, Central Bank of Chile.
    15. Guy Debelle, 2004. "Household debt and the macroeconomy," BIS Quarterly Review, Bank for International Settlements, March.
    16. 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.
    17. Ana del Rio & Garry Young, 2008. "The impact of unsecured debt on financial pressure among British households," Applied Financial Economics, Taylor & Francis Journals, vol. 18(15), pages 1209-1220.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fernando Borraz & Nicolas Gonzalez Pampillon, 2015. "Financial Risk of Uruguayan Households," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 30(2), pages 19-43, October.
    2. Cifuentes, Rodrigo & Margaretic, Paula & Saavedra, Trinidad, 2020. "Measuring households' financial vulnerabilities from consumer debt: Evidence from Chile," Emerging Markets Review, Elsevier, vol. 43(C).
    3. Giordana, Gastón & Ziegelmeyer, Michael, 2020. "Stress testing household balance sheets in Luxembourg," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 115-138.
    4. Savvas Antoniou & Ioanna Evangelou & Theodosis Kallenos & Nektarios A. Michail, 2022. "Estimating the Mortgage Default Probability in Cyprus: Evidence using micro data," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 16(1), pages 37-49, June.
    5. Lemus, Antonio & Pulgar, Carlos, 2021. "Households’ Debt Thresholds: A Market Aspects Approach," MPRA Paper 106958, University Library of Munich, Germany.
    6. Carlos Madeira, 2014. "El Impacto del Endeudamiento y Riesgo de Desempleo en la Morosidad de las Familias Chilenas," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(1), pages 88-102, April.
    7. Jaanika Meriküll & Tairi Rõõm, 2020. "Stress Tests of the Household Sector Using Microdata from Survey and Administrative Sources," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 203-248, March.
    8. Rodrigo Cifuentes & Felipe Martínez, 2020. "Over-indebtedness in Households: Measurement and Determinants," Working Papers Central Bank of Chile 869, Central Bank of Chile.
    9. Jaime Ruiz-Tagle & Leidy García & Álvaro Miranda, 2013. "Proceso de Endeudamiento y Sobre Endeudamiento de los Hogares en Chile," Working Papers Central Bank of Chile 703, Central Bank of Chile.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giarda, Elena, 2013. "Persistency of financial distress amongst Italian households: Evidence from dynamic models for binary panel data," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3425-3434.
    2. Rodrigo Cifuentes & Felipe Martínez, 2020. "Over-indebtedness in Households: Measurement and Determinants," Working Papers Central Bank of Chile 869, Central Bank of Chile.
    3. Thorvardur Tjörvi Ólafsson & Karen Á. Vignisdóttir, 2012. "Households’ position in the financial crisis in Iceland. Analysis based on a nationwide household-level database," Economics wp59, Department of Economics, Central bank of Iceland.
    4. David ARISTEI & Manuela Gallo, 2012. "The Drivers of Household Over-Indebtedness and Delinquency on Mortgage Loans: Evidence from Italian Microdata," Quaderni del Dipartimento di Economia, Finanza e Statistica 105/2012, Università di Perugia, Dipartimento Economia.
    5. Cifuentes, Rodrigo & Margaretic, Paula & Saavedra, Trinidad, 2020. "Measuring households' financial vulnerabilities from consumer debt: Evidence from Chile," Emerging Markets Review, Elsevier, vol. 43(C).
    6. Burcu Duygan-Bump & Charles Grant, 2008. "Household debt repayment behaviour: what role do institutions play?," Supervisory Research and Analysis Working Papers QAU08-3, Federal Reserve Bank of Boston.
    7. Piotr Bialowolski & Dorota Weziak-Bialowolska, 2014. "Erratum to: The Index of Household Financial Condition, Combining Subjective and Objective Indicators: An Appraisal of Italian Households," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 118(1), pages 387-387, August.
    8. Petr Jakubík, 2011. "Household Balance Sheets and Economic Crisis," Working Papers IES 2011/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
    9. repec:ptu:bdpart:r201205 is not listed on IDEAS
    10. Mikus Arins & Nadezda Sinenko & Laura Laube, 2014. "Survey-Based Assessment of Household Borrowers' Financial Vulnerability," Discussion Papers 2014/01, Latvijas Banka.
    11. Ivana Herceg & Danijel Nestić, 2012. "A New Cluster-Based Financial Vulnerability Indicator: The Analytical Concept and its Application for Stress Testing in a Post-Socialist Economy," wiiw Balkan Observatory Working Papers 100, The Vienna Institute for International Economic Studies, wiiw.
    12. Hosung Jung & Hyun Hak Kim, 2020. "Default Probability by Employment Status in South Korea," Asian Economic Papers, MIT Press, vol. 19(3), pages 62-84, Fall.
    13. Marco Brandolini & Federica Coroneo & Elena Giarda & Cristiana Moriconi & Sarah Grace See, 2022. "Differences in Perceptions of the Housing Cost Burden Among European Countries," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(4), pages 1-5.
    14. Ampudia, Miguel & van Vlokhoven, Has & Żochowski, Dawid, 2016. "Financial fragility of euro area households," Journal of Financial Stability, Elsevier, vol. 27(C), pages 250-262.
    15. Piotr Bialowolski & Dorota Weziak-Bialowolska & Eileen McNeely, 2021. "The Role of Financial Fragility and Financial Control for Well-Being," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 155(3), pages 1137-1157, June.
    16. Chichaibelu, Bezawit Beyene & Waibel, Hermann, 2017. "Borrowing from “Pui” to Pay “Pom”: Multiple Borrowing and Over-Indebtedness in Rural Thailand," World Development, Elsevier, vol. 98(C), pages 338-350.
    17. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2016. "Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(4), pages 628-649, December.
    18. James MacGee, 2012. "The Rise in Consumer Credit and Bankruptcy: Cause for Concern?," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 346, April.
    19. Joachim Hubmer, 2018. "The Job Ladder and its Implications for Earnings Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 172-194, July.
    20. Murtin, Fabrice & de Serres, Alain & Hijzen, Alexander, 2014. "Unemployment and the coverage extension of collective wage agreements," European Economic Review, Elsevier, vol. 71(C), pages 52-66.
    21. Mocetti, Sauro & Viviano, Eliana, 2017. "Looking behind mortgage delinquencies," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 53-63.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:682. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alvaro Castillo (email available below). General contact details of provider: https://edirc.repec.org/data/bccgvcl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.