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Forward-looking Estimation of Default Probabilities with Italian Data

18 Pages Posted: 6 May 2005  

Giuseppe Marotta

Department of Economics Marco Biagi and CEFIN; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics

Chiara Pederzoli

Università degli Studi di Milano-Bicocca - Istituto di Economia Amministrazione e Politica Aziendale

Costanza Torricelli

University of Modena and Reggio Emilia - Department of Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN); Center for Research on Pensions and Welfare Policies (CeRP)

Date Written: April 2005

Abstract

The solution adopted in Basel II to deal with procyclicality of capital requirements (i.e. through the cycle ratings and long-run average estimates of default probabilities) implies a reduction in the risk-sensitivity that contradicts the original spirit of the new framework.

In order to preserve risk-sensitivity and to dampen procyclicality at the same time, Pederzoli and Torricelli (2005) set up a model which relies on a business cycle forecast in the estimation of the default probability and provide an application for the US. The modelling approach hinges on a forward-looking definition of capital requirements, in anticipation of the business cycle with a possible smoothing effect on the business cycle turning points.

The present paper checks the robustness of the approach for the Italian case, where alternative business cycles chronologies are used and ratings have to be approximated by exploiting default data provided by the Bank of Italy. Findings suggest that the comparison between the alternative chronologies is an important issue.

Keywords: Basel II, business cycle, capital requirement, default probability, procyclicality

JEL Classification: G21, G28, E32

Suggested Citation

Marotta, Giuseppe and Pederzoli, Chiara and Torricelli, Costanza, Forward-looking Estimation of Default Probabilities with Italian Data (April 2005). Available at SSRN: https://ssrn.com/abstract=715921 or http://dx.doi.org/10.2139/ssrn.715921

Giuseppe Marotta (Contact Author)

Department of Economics Marco Biagi and CEFIN ( email )

via Berengario 51
Modena, modena I-41100
Italy

HOME PAGE: http://morgana.unimore.it/marotta_giuseppe/

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41121 Modena, Modena 41100
Italy
+39 59 205 6875 (Phone)
+39 59 205 6948 (Fax)

HOME PAGE: http://morgana.unimore.it/marotta_giuseppe/

Chiara Pederzoli

Università degli Studi di Milano-Bicocca - Istituto di Economia Amministrazione e Politica Aziendale ( email )

20126 Milano
Italy

Costanza Torricelli

University of Modena and Reggio Emilia - Department of Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy
+390592056733 (Phone)
+390592056937 (Fax)

HOME PAGE: http://www.economia.unimore.it/torricelli_costanza/index.htm

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

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