Credit Risk Modeling With Jointly Spanned and Unspanned Interest Rate and Unspanned Bei Rate: A Macro-Finance Approach
31 Pages Posted: 17 Jul 2019 Last revised: 8 Nov 2019
Date Written: July 16, 2019
The paper quantiﬁes the inﬂuence of interest rates and inﬂation rates on default rates of banks. By expanding the work of Duﬀee (1998), with the unspanned risks as in Joslin et al (2014), we estimate a multifactor model with unspanned interest rates and inﬂation rates to test the performance of unspanned variables in the default rate term structure of banks. The model is trained in samples of positive interest rates and evaluated in samples of negative interest rates. We check the robustness of the model by comparing the results with the performance of alternative model speciﬁcations. The model reveals that unspanned variables have a worse performance than alternative models speciﬁcations.
Keywords: Default Rates, Interest Rates, Inflation Rates, Term Structure, Kalman Filter, Out of Sample, Model Specification
JEL Classification: C51, G43, E51, E52
Suggested Citation: Suggested Citation