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Macroeconomic Dynamics and Credit Risk: A Global Perspective
Year Of Publication: 2004
Month Of Publication: April
Pages: 57
Download Count: 823
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 8-29-2004
Publisher: Administrator
Summary
This paper presents a new approach to modeling conditional credit loss distributions. Assetvalue changes of firms in a credit portfolio are linked to a dynamic global macroeconometricmodel, allowing macro effects to be isolated from idiosyncratic shocks from the perspective ofdefault (and hence loss). Default probabilities are driven primarily by how firms are tied tobusiness cycles, both domestic and foreign, and how business cycles are linked across countries.We allow for firm-specific business cycle effects and the heterogeneity of firm default thresholdsusing credit ratings. Our approach has the advantage that it does not rely on accountingdata which are at best noisy and at worst biased due to the information asymmetries betweencompany managers (agents) and share/debt holders (principals). The model can be used, forexample, to compute the effects of a hypothetical negative equity price shock in South East Asiaon the loss distribution of a credit portfolio with global exposures over one or more quarters. Weshow that the effects of such shocks on losses are asymmetric and non-proportional, reflectingthe highly non-linear nature of the credit risk model. The overall results are quite reasonable:expected losses are in line with average charge-offs by U.S. banks over the last 14 years.
Author(s)
Pesaran, M. Hashem Sign in to follow this author
Schuermann, Til Sign in to follow this author
Treutler, Bjorn-Jakob Sign in to follow this author
Weiner, Scott M. Sign in to follow this author
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