Global Business Cycles and Credit Risk

56 Pages Posted: 29 Aug 2005

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.

Suggested Citation

Pesaran, M. Hashem and Treutler, Björn-Jakob and Schuermann, Til, Global Business Cycles and Credit Risk (July 2005). NBER Working Paper No. w11493. Available at SSRN: https://ssrn.com/abstract=762771

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

Björn-Jakob Treutler

Mercer Oliver Wyman ( email )

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

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
52
Abstract Views
1,259
rank
94,277
PlumX Metrics