Credit Risk Contagion in German Auto Loans

Abstract

We investigate default clusters and reveal credit contagion risk in a data set containing
over four million German auto loans. We demonstrate that auto loan defaults cannot be
attributed to loan-, borrower-, and asset-specific variables and macroeconomic effects alone.
Therefore, we explicitly model contagion effects and reveal that the default of one auto loan
can lead to the defaults of other auto loans. Our results are highly relevant for banks’ risk
management of auto loan portfolios, rating agencies, and regulators because they indicate
that contagion effects should be considered when assessing credit risk.

Keywords: Credit Contagion, Auto Loans, Default Clustering, Correlated Default Risk

JEL Classification: G11, G21, G23