Macroeconomic Impact on Expected Default Freqency
Riksbank Research Paper Series No. 51
Riksbank Working Paper No. 220
34 Pages Posted: 30 Jan 2008
Date Written: November 2008
Abstract
We use a vector error correction model to study the long-term relationship between aggregate expected default frequency and the macroeconomic development, i.e. CPI, industry production and short-term interest rate. The model is used to forecast the median expected default frequency of the corporate sector by conditioning on external forecasts of macroeconomic developments. Evaluations of the model show that it yields low forecast errors in terms of RMSE. The estimation results indicate that the interest rate has the strongest impact on expected default frequency among the included macroeconomic variables. The forecasts indicate that EDF will rise gradually over the forecast period.
Keywords: Expected Default Frequency, Macroeconomic Impact, Business cycle, vector error correction model, Financial stability, Financial and real economy interaction
JEL Classification: C32, C52, C53, G21, G33
Suggested Citation: Suggested Citation
Do you want regular updates from SSRN on Twitter?
Recommended Papers
-
Stress-Testing Financial Systems: An Overview of Current Methodologies
By Marco Sorge
-
Macro Stress Testing with a Macroeconomic Credit Risk Model for Finland
-
The Role of Macroeconomic Shocks in Banking Crises
By Jarmo Pesola
-
Stress Tests of UK Banks Using a VAR Approach
By Glenn Hoggarth, Steffen Sorensen, ...
-
Stress Testing Credit Risk: A Survey of Authorities' Approaches
-
Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program (Fsap)
By Renzo Avesani, Kexue Liu, ...
-
Fundamentals-Based Estimation of Default Probabilities: A Survey
-
Banking Fragility and Distress: An Econometric Study of Macroeconomic Determinants
By Jarmo Pesola
-
Global Macro-Financial Shocks and Expected Default Frequencies in the Euro Area
By Olli Castren, Stephane Dees, ...
-
A Framework for Stress Testing Banks' Credit Risk
By Jim Wong, Ka-fai Choi, ...