Multiyear Risk of Credit Losses in SME Portfolios

Journal of Financial Forecasting, Vol. 1, No. 2, Fall 2007, pp. 25-53

39 Pages Posted: 10 Nov 2013

See all articles by Alfred Hamerle

Alfred Hamerle

University of Regensburg - Faculty of Business, Economics & Information Systems

Rainer Jobst

University of Regensburg

Thilo Liebig

Deutsche Bundesbank

Daniel Roesch

University of Regensburg

Date Written: 2007

Abstract

We model multiyear loss distributions based on credit scores and macroeconomic risk drivers. In a two-step approach, we first model future default probabilities as functions of these risk factors and, second, model processes for the risk factors themselves. As an essential extension to one-year forecasts – used e.g. for calculating a bank’s regulatory capital charges under Basel II – we explicitly consider forecasting errors. These errors are introduced by forecasting future paths of the risk factors. We distinguish between idiosyncratic and systematic forecasting errors and show their effects on individual default probability and portfolio loss distribution forecasts using data provided by Deutsche Bundesbank. It turns out that default probability forecasts are much noisier than portfolio risk forecasts due to the possibility of diversification of idiosyncratic forecasting errors in the latter.

Suggested Citation

Hamerle, Alfred and Jobst, Rainer and Liebig, Thilo and Roesch, Daniel, Multiyear Risk of Credit Losses in SME Portfolios (2007). Journal of Financial Forecasting, Vol. 1, No. 2, Fall 2007, pp. 25-53, Available at SSRN: https://ssrn.com/abstract=2349313

Alfred Hamerle

University of Regensburg - Faculty of Business, Economics & Information Systems ( email )

Universitstrasse 31
Regensberg D-93053
Germany

Rainer Jobst

University of Regensburg ( email )

93040 Regensburg
D-93040 Regensburg, 93053
Germany

Thilo Liebig

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
47
Abstract Views
649
PlumX Metrics