Macro Stress Testing on Credit Risk of Commercial Banks in China Based on Vector Autoregression Models

39 Pages Posted: 16 Aug 2011

See all articles by Tian Rongjie

Tian Rongjie

Beijing Institute of Technology

Jiawen Yang

George Washington University - School of Business

Date Written: March 17, 2011

Abstract

This paper develops a framework for stress-testing the credit risk of Chinese commercial banks to macroeconomic shocks. Using data over the period 1985-2008, this study establishes a vector auto-regression (VAR) model to describe the links between default rate and macroeconomic factors, and then designs three stress scenarios to implement the stress testing by Monte Carlo simulation. As a result, a credit loss distribution is generated. Our results indicate that the shocks in real property and CPI bring long term and worst impact on credit risk to commercial banks in China.

Keywords: Credit risk, Macro stress testing, Commercial bank, VAR model

JEL Classification: G21, G32, E17

Suggested Citation

Rongjie, Tian and Yang, Jiawen, Macro Stress Testing on Credit Risk of Commercial Banks in China Based on Vector Autoregression Models (March 17, 2011). Available at SSRN: https://ssrn.com/abstract=1909327 or http://dx.doi.org/10.2139/ssrn.1909327

Tian Rongjie (Contact Author)

Beijing Institute of Technology ( email )

5 South Zhongguancun street
Center for Energy and Environmental Policy Researc
Beijing, Haidian District 100081
China

Jiawen Yang

George Washington University - School of Business ( email )

Washington, DC 20052
United States
202-994-8709 (Phone)
202-994-7422 (Fax)

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