COVID-19, Credit Risk and Macro Fundamentals

Anna Dubinova, Andre Lucas and Sean Telg
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Anna Dubinova: Vrije Universiteit Amsterdam

No 21-059/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We investigate the relationship between macro fundamentals and credit risk, rating migrations and defaults during the start of the COVID-19 pandemic. We find that credit risk models that use macro fundamentals as covariates overestimate credit risk incidence due to the unprecedented drops in economic activity in the first lockdowns. We argue that this break in the macro-credit linkage is less affected if we take an unobserved components modeling framework, both at shorter and longer credit risk horizons.

Keywords: COVID-19; credit risk; macro fundamentals; frailty factors; dynamic latent factors (search for similar items in EconPapers)
JEL-codes: C22 G21 (search for similar items in EconPapers)
Date: 2021-06-28
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-ore and nep-rmg
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