Business Cycle and Realized Losses in the Consumer Credit Industry

36 Pages Posted: 9 Jan 2024

See all articles by Francesco Roccazzella

Francesco Roccazzella

IESEG School of Management

Walter Distaso

Imperial College Business School

Frédéric D. Vrins

LFIN/LIDAM, UCLouvain

Date Written: December 13, 2023

Abstract

We study the determinants of the loss given default (LGD) of consumer credit. Exploiting a dataset including more than 6 million of Italian consumer loans from 2007 to 2019, we find that macroeconomic and social variables significantly enhance forecasting performance both at the individual and portfolio levels, by up to 10 percentage points in terms of R2. This result is robust across forecasting exercises and model specifications. In particular, non-linear forecast combination schemes relying on neural networks are among the best performers in terms of mean absolute error, RMSE, R2, and model confidence set in every considered exercise. The relationship between the expected LGD and the macro predictors unveiled by accumulated local effects plots confirms the intuition that lower real activity, increasing cost-of-debt to GDP ratio, and greater economic uncertainty are associated with a greater LGD for consumer credit.

Keywords: Credit Risk, Consumer Credit, Loss Given Default, Non-Performing Loans

Suggested Citation

Roccazzella, Francesco and Distaso, Walter and Vrins, Frederic Daniel, Business Cycle and Realized Losses in the Consumer Credit Industry (December 13, 2023). Available at SSRN: https://ssrn.com/abstract=4663161 or http://dx.doi.org/10.2139/ssrn.4663161

Francesco Roccazzella (Contact Author)

IESEG School of Management ( email )

Walter Distaso

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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