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Business cycle and realized losses in the consumer credit industry

Author

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  • Distaso, Walter
  • Roccazzella, Francesco
  • Vrins, Frédéric

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

Abstract

We study the determinants of the loss given default (LGD) of consumer credit. Exploiting a dataset including more than 6 million of Italian consumer loans from 2007 to 2019, we find that macroeco- nomic and social variables significantly enhance forecasting performance both at the individual and portfolio levels, by up to 10 percentage points in terms of R2. This result is robust across forecasting exercises and model specifications. In particular, non-linear forecast combination schemes relying on neural networks are among the best performers in terms of mean absolute error, RMSE, R2, and model confidence set in every considered exercise. The relationship between the expected LGD and the macro predictors unveiled by accumulated local effects plots confirms the intuition that lower real activity, increasing cost-of-debt to GDP ratio, and greater economic uncertainty are associated with a greater LGD for consumer credit.

Suggested Citation

  • Distaso, Walter & Roccazzella, Francesco & Vrins, Frédéric, 2023. "Business cycle and realized losses in the consumer credit industry," LIDAM Discussion Papers LFIN 2023007, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlf:2023007
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    References listed on IDEAS

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    Cited by:

    1. Barbagli, Matteo & François, Pascal & Gauthier, Geneviève & Vrins, Frédéric, 2024. "The role of CDS spreads in explaining bond recovery rates," LIDAM Discussion Papers LFIN 2024002, Université catholique de Louvain, Louvain Finance (LFIN).

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