Modeling the distribution of credit losses with observable and latent factors

Gabriel Jimenez and Javier Mencia ()

No 709, Working Papers from Banco de España

Abstract: This paper develops a flexible and computationally efficient model to estimate the credit loss distribution of the loans in a banking system. We consider a sectorial structure, where default frequencies and the total number of loans are allowed to depend on macroeconomic conditions as well as on unobservable credit risk factors, which can capture contagion effects between sectors. In addition, we also model the distributions of the Exposure at Default and the Loss Given Default. We apply our model to the Spanish credit market, where we find that sectorial default frequencies are affected by a persistent latent factor. Finally, we also identify the potentially riskier sectors and perform stress tests.

Keywords: credit risk; probability of default; loss distribution; stress test; contagion (search for similar items in EconPapers)
JEL-codes: E32 E37 G21 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2007-04
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/07/Fic/dt0709e.pdf First version, April 2007 (application/pdf)

Related works:
Journal Article: Modelling the distribution of credit losses with observable and latent factors (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0709

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