Macroeconomics and Credit Risk: A Global Perspective

Journal of Money, Credit, and Banking, Forthcoming

Wharton Financial Institutions Center Working Paper No. 03-13

60 Pages Posted: 17 May 2003

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Björn-Jakob Treutler

Mercer Oliver Wyman

Til Schuermann

Oliver Wyman

Scott M. Weiner

Alliance Capital Management

Abstract

This paper presents a new approach to modeling conditional credit loss distributions. Asset value changes of firms in a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks from the perspective of default (and hence loss). Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and foreign, and how business cycles are linked across countries. We allow for firm-specific business cycle effects and the heterogeneity of firm default thresholds using credit ratings. The model can be used, for example, to compute the effects of a hypothetical negative equity price shock in South East Asia on the loss distribution of a credit portfolio with global exposures over one or more quarters. We show that the effects of such shocks on losses are asymmetric and non-proportional, reflecting the highly non-linear nature of the credit risk model.

Keywords: Risk management, economic interlinkages, loss forecasting, default correlation

JEL Classification: C32, E17, G20

Suggested Citation

Pesaran, M. Hashem and Treutler, Björn-Jakob and Schuermann, Til and Weiner, Scott M., Macroeconomics and Credit Risk: A Global Perspective. Journal of Money, Credit, and Banking, Forthcoming; Wharton Financial Institutions Center Working Paper No. 03-13. Available at SSRN: https://ssrn.com/abstract=396580 or http://dx.doi.org/10.2139/ssrn.396580

M. Hashem Pesaran

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Björn-Jakob Treutler

Mercer Oliver Wyman ( email )

Bleichstrasse 1
60313 Frankfurt
Germany
+49-69-97173-558 (Phone)
+49-69-955-12010 (Fax)

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Scott M. Weiner

Alliance Capital Management ( email )

1345 Avenue of the Americas
New York, NY 10105
United States
212-969-6077 (Phone)
212-969-2226 (Fax)

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