Macroeconomic Dynamics and Credit Risk: A Global Perspective

70 Pages Posted: 21 Aug 2003

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

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

Til Schuermann

Oliver Wyman

Björn-Jakob Treutler

Mercer Oliver Wyman

Scott M. Weiner

Alliance Capital Management

Date Written: July 2003

Abstract

We develop a framework for modeling conditional loss distributions through the introduction of risk factor dynamics. Asset value changes of a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks. 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. The model is able to control for firm-specific heterogeneity as well as generate multi-period forecasts of the entire loss distribution, conditional on specific macroeconomic scenarios.

Keywords: Risk Management, Economic Interlinkages, Loss Forecasting, Default Correlation

JEL Classification: C32, E17, G20

Suggested Citation

Pesaran, M. Hashem and Schuermann, Til and Treutler, Björn-Jakob and Weiner, Scott M., Macroeconomic Dynamics and Credit Risk: A Global Perspective (July 2003). CESifo Working Paper Series No. 995. Available at SSRN: https://ssrn.com/abstract=432903

M. Hashem Pesaran (Contact Author)

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

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Björn-Jakob Treutler

Mercer Oliver Wyman ( email )

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

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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