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A Causal Framework for Credit Default Theory

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  • Wilson Sy

    (Australian Prudential Regulatory Authority)

Abstract

Most existing credit default theories do not link causes directly to the effect of default and are unable to evaluate credit risk in a rapidly changing market environment, as experienced in the recent mortgage and credit market crisis. Causal theories of credit default are needed to understand lending risk systematically and ultimately to measure and manage credit risk dynamically for financial system stability. Unlike existing theories, credit default is treated in this paper by a joint model with dual causal processes of delinquency and insolvency. A framework for developing causal credit default theories is introduced through the example of a new residential mortgage default theory. This theory overcomes many limitations of existing theories, solves several outstanding puzzles and integrates both micro and macroeconomic factors in a unified financial economic theory for mortgage default.

Suggested Citation

  • Wilson Sy, 2007. "A Causal Framework for Credit Default Theory," Research Paper Series 204, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:204
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-02/QFR-rp204.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kelly, Robert & McCarthy, Yvonne & McQuinn, Kieran, 2012. "Impairment and negative equity in the Irish mortgage market," Journal of Housing Economics, Elsevier, vol. 21(3), pages 256-268.
    2. Dewan Abdullah Al Rafi & Sanzida Taurin & Kentaka Aruga & Md. Monirul Islam & Arifa Jannat, 2022. "Revealing the pathway of reluctancy toward agricultural credit repayment: a case study on fish farmers in Bangladesh," SN Business & Economics, Springer, vol. 2(6), pages 1-24, June.
    3. Ezekiel Adu Mensah. (CA, MCIT, MBA) & Nana Boatemaa Boadi (BSc, MBA) & Juliet Appiah Osei-Afoakwa (B.Ed, MBA, CA, MCIT) & Linda Quansah Ewudzie (BSc, MSc), 2024. "A Comparative Study of Non-Performing Assets of Foreign and Local Banks in Ghana: The Case of GCB Bank Ltd and Standard Chartered Bank in Ghana," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(6), pages 3145-3172, June.
    4. David E Allen & Robert Powell, 2012. "The fluctuating default risk of Australian banks," Australian Journal of Management, Australian School of Business, vol. 37(2), pages 297-325, August.
    5. Isma il Tijjani Idris & Sabri Nayan, 2017. "A Pooled Mean Group Approach to the Joint Effects of Oil Price Changes and Environmental Risks on Non-Performing Loans: Evidence from Organisation of the Petroleum Exporting the Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 7(3), pages 345-351.
    6. Graham Andersen & David Chisholm, 2011. "A Mathematical Method for Deriving the Relative Effect of Serviceability on Default Risk," Papers 1111.5397, arXiv.org.
    7. Ismail Tijjani Idris & Sabri Nayan, 2016. "The Joint Effects of Oil Price Volatility and Environmental Risks on Non-performing Loans: Evidence from Panel Data of Organization of the Petroleum Exporting Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 6(3), pages 522-528.

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    More about this item

    Keywords

    causal framework; credit default risk; delinquency; insolvency; mortgage defualt;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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