Estimating individuals’ default risk in Portugal

This paper estimates econometric models of default risk for individuals obtaining credit in Portugal using data from Banco de Portugal’s Credit Register. We estimate monthly default probabilities for mortgage and consumer loans over three, six, and twelve-month horizons. The models combine cross-sectional and time series components. The cross-sectional component captures default risk heterogeneity across individuals by relating default risk to loan and borrower characteristics. The time series component captures time variation in aggregate default risk by linking it with macroeconomic variables. Our findings indicate that the model’s performance in distinguishing between defaulting and non-defaulting borrowers is on par with or superior to existing literature. The results also show a close alignment between average default probabilities and actual default rates across various borrower characteristics and lending institutions.