Does Credit Risk Vary with Economic Cycles? The Case of Finland

Petr Jakubík

No 2006/11, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: The significance of credit risk models has increased with the introduction of new Basel accord known as Basel II. The aim of this study is default rate modeling. This paper follows the two possible approaches of a macro credit risk modeling. First, empirical models are investigated. Second, a latent factor model based on Merton's idea is introduced. Both of these models are derived from individual default probability models. We employed data over the time period from 1988 to 2003 of the Finnish economy. First, linear vector autoregressive models were used in the case of dynamic empirical model. We examined how significant macroeconomic indicators determined the default rate in the economy. However these models cannot provide microeconomic foundation as latent factor models. A one-factor model was estimated using disaggregated industrial data. This estimation can help understand relation between credit risk and macroeconomic indicators. Models can be used for default rate prediction or stress testing by central authorities.

Keywords: banking; credit risk; latent factor model; default rate (search for similar items in EconPapers)
JEL-codes: G21 G28 G33 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2006-04, Revised 2006-04
New Economics Papers: this item is included in nep-ban, nep-bec and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://ies.fsv.cuni.cz/default/file/download/id/3869 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://ies.fsv.cuni.cz/default/file/download/id/3869 [301 Moved Permanently]--> https://ies.fsv.cuni.cz/default/file/download/id/3869)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2006_11

Access Statistics for this paper

More papers in Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies Contact information at EDIRC.
Bibliographic data for series maintained by Natalie Svarcova ().