Global Business Cycles and Credit Risk

56 Pages Posted: 29 Aug 2005 Last revised: 29 May 2022

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics

Björn-Jakob Treutler

Mercer Oliver Wyman

Til Schuermann

Oliver Wyman

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005


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:

M. Hashem Pesaran (Contact Author)

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Til Schuermann

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