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Are Default Rate Time Series Stationary? A Practical Approach for Banking Experts

Author

Listed:
  • Gabor Szigel

    (OTP Bank Nyrt)

  • Boldizsar Istvan Gyurus

    (OTP Bank Nyrt)

Abstract

As the IFRS 9 accounting standard requires banks to recognise impairments based on a forward-looking expected loss concept, banks must estimate the quantitative relationship between default rates and macroeconomic indicators (GDP, unemployment, etc.). In such models, the stationarity of the (usually short) default rate time series is often the most critical issue. In this article, we provide practical advice for banking experts on how (under which circumstances) they can still use short default rate time series in OLS regressions even if those fail regular stationarity tests. We argue that if margin of conservativism is requested for the underlying default rate projections, then applying (seemingly) non-stationary default rate time series in OLS models might not necessarily be problematic.

Suggested Citation

  • Gabor Szigel & Boldizsar Istvan Gyurus, 2023. "Are Default Rate Time Series Stationary? A Practical Approach for Banking Experts," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 22(4), pages 107-135.
    • Handle: RePEc:mnb:finrev:v:22:y:2023:i:4:p:107-135
    as

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    File URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-22-4-st4-szigel-gyurus.pdf
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    References listed on IDEAS

    as
    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    2. Cochrane, John H., 1991. "A critique of the application of unit root tests," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 275-284, April.
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    More about this item

    Keywords

    default rates; probability of default; stationarity; time series analysis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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

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