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Measuring expected time to default under stress conditions for corporate loans

Author

Listed:
  • Mariusz Górajski

    (University of Łódź)

  • Dobromił Serwa

    (SGH Warsaw School of Economics
    Narodowy Bank Polski)

  • Zuzanna Wośko

    (SGH Warsaw School of Economics)

Abstract

We present a new measure of extreme credit risk in the time domain, namely the conditional expected time to default (CETD). This measure has a clear interpretation and can be applied in a straightforward way to the analyses of loan performance in time. In contrast to the probability of default, CETD provides direct information on the timing of a potential loan default under some stress scenarios. We apply a novel method to compute CETD using Markov probability transition matrices, a popular approach in the survival analysis literature. We employ the new measure to the analysis of changing credit risk in a large portfolio of corporate loans. CETD changes through time in line with other measures of credit risk and is positively related to output growth.

Suggested Citation

  • Mariusz Górajski & Dobromił Serwa & Zuzanna Wośko, 2019. "Measuring expected time to default under stress conditions for corporate loans," Empirical Economics, Springer, vol. 57(1), pages 31-52, July.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:1:d:10.1007_s00181-018-1435-6
    DOI: 10.1007/s00181-018-1435-6
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    More about this item

    Keywords

    Credit risk; Time to default; Value at risk; Conditional ETD;
    All these keywords.

    JEL classification:

    • 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
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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