Portfolio Credit Risk and Macroeconomic Shocks: Applications to Stress Testing Under Data-Restricted Environments

52 Pages Posted: 12 Jan 2007

See all articles by Miguel Segoviano Basurto

Miguel Segoviano Basurto

International Monetary Fund (IMF) - Monetary and Financial Systems Department

Pablo Padilla

Universidad Nacional Autónoma de México (UNAM)

Date Written: January 2007

Abstract

Portfolio credit risk measurement is greatly affected by data constraints, especially when focusing on loans given to unlisted firms. Standard methodologies adopt convenient, but not necessarily properly specified parametric distributions or simply ignore the effects of macroeconomic shocks on credit risk. Aiming to improve the measurement of portfolio credit risk, we propose the joint implementation of two new methodologies, namely the conditional probability of default (CoPoD) methodology and the consistent information multivariate density optimizing (CIMDO) methodology. CoPoD incorporates the effects of macroeconomic shocks into credit risk, recovering robust estimators when only short time series of loans exist. CIMDO recovers portfolio multivariate distributions (on which portfolio credit risk measurement relies) with improved specifications, when only partial information about borrowers is available. Implementation is straightforward and can be very useful in stress testing exercises (STEs), as illustrated by the STE carried out within the Danish Financial Sector Assessment Program.

Keywords: Credit risk, Economic conditions, Statistics, Economic models

JEL Classification: C2, C19, C52, C61, E32, G21

Suggested Citation

Segoviano Basurto, Miguel and Padilla, Pablo, Portfolio Credit Risk and Macroeconomic Shocks: Applications to Stress Testing Under Data-Restricted Environments (January 2007). IMF Working Paper No. 06/283, Available at SSRN: https://ssrn.com/abstract=956746

Miguel Segoviano Basurto (Contact Author)

International Monetary Fund (IMF) - Monetary and Financial Systems Department ( email )

Washington, DC
United States

Pablo Padilla

Universidad Nacional Autónoma de México (UNAM)

Circuito Mario de la Cueva s/n
Lomas de las Palmas, 52760
Mexico

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