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A Causal Framework for Credit Default Theory


  • Wilson Sy

    (Australian Prudential Regulatory Authority)


Most existing credit default theories do not link causes directly to the effect of default and are unable to evaluate credit risk in a rapidly changing market environment, as experienced in the recent mortgage and credit market crisis. Causal theories of credit default are needed to understand lending risk systematically and ultimately to measure and manage credit risk dynamically for financial system stability. Unlike existing theories, credit default is treated in this paper by a joint model with dual causal processes of delinquency and insolvency. A framework for developing causal credit default theories is introduced through the example of a new residential mortgage default theory. This theory overcomes many limitations of existing theories, solves several outstanding puzzles and integrates both micro and macroeconomic factors in a unified financial economic theory for mortgage default.

Suggested Citation

  • Wilson Sy, 2007. "A Causal Framework for Credit Default Theory," Research Paper Series 204, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:204

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    References listed on IDEAS

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    Cited by:

    1. Kelly, Robert & McCarthy, Yvonne & McQuinn, Kieran, 2012. "Impairment and negative equity in the Irish mortgage market," Journal of Housing Economics, Elsevier, vol. 21(3), pages 256-268.
    2. David E Allen & Robert Powell, 2012. "The fluctuating default risk of Australian banks," Australian Journal of Management, Australian School of Business, vol. 37(2), pages 297-325, August.

    More about this item


    causal framework; credit default risk; delinquency; insolvency; mortgage defualt;

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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