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Macroeconomic Dynamics and Credit Risk: A Global Perspective

Author

Listed:
  • Til Schuermann
  • Björn-Jakob Treutler
  • Scott M. Weiner
  • M. Hashem Pesaran

Abstract

We develop a framework for modeling conditional loss distributions through the introduction of risk factor dynamics. Asset value changes of a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks. Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and foreign, and how business cycles are linked across countries. The model is able to control for firm-specific heterogeneity as well as generate multi-period forecasts of the entire loss distribution, conditional on specific macroeconomic scenarios.

Suggested Citation

  • Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & M. Hashem Pesaran, 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," CESifo Working Paper Series 995, CESifo.
    • Handle: RePEc:ces:ceswps:_995
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    References listed on IDEAS

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    More about this item

    Keywords

    risk management; economic interlinkages; loss forecasting; default correlation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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