Scenario Analysis with the DD-PD Mapping Approach: Stock Market Shocks and U.S. Corporate Default Risk

IMF Working Paper Series 21/143, 2021

24 Pages Posted: 25 Jun 2021

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO); National University of Singapore (NUS) - Risk Management Institute

Date Written: May 1, 2021

Abstract

This paper introduces the quantile regression- based Distance-to-Default to Probability of Default (DD-PD) mapping, which links individual firms’ DD to their real world PD. Since changes in the DD depend on a handful of parameters, the mapping easily accommodates shocks arising from quantitative and narrative scenarios informed by expert judgment. At end-2020, risks from stock market corrections in the U.S. are concentrated in the energy, financial and technology sectors, and additional bank capital needs could be large. The paper concludes discussing uses of the mapping beyond PD valuation suitable for capital structure analysis, credit portfolio management, and long-term scenario planning analysis.

Keywords: probability of default, distance-to-default, default risk, stock markets, quantile regression, scenario analysis, stress test

JEL Classification: C22, C53, G32

Suggested Citation

Chan-Lau, Jorge Antonio, Scenario Analysis with the DD-PD Mapping Approach: Stock Market Shocks and U.S. Corporate Default Risk (May 1, 2021). IMF Working Paper Series 21/143, 2021, Available at SSRN: https://ssrn.com/abstract=3867829 or http://dx.doi.org/10.2139/ssrn.3867829

Jorge Antonio Chan-Lau (Contact Author)

ASEAN+3 Macroeconomic Research (AMRO) ( email )

10 Shenton Way #11-07/08
MAS Building
Singapore, 079117
Singapore

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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