A Causal Framework for Credit Default Theory

Wilson Sy
Additional contact information
Wilson Sy: Australian Prudential Regulatory Authority

No 204, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Most existing credit default theories do not link causes directly to the effect of default and are unable to evaluate credit risk in a rapidly changing market environment, as experienced in the recent mortgage and credit market crisis. Causal theories of credit default are needed to understand lending risk systematically and ultimately to measure and manage credit risk dynamically for financial system stability. Unlike existing theories, credit default is treated in this paper by a joint model with dual causal processes of delinquency and insolvency. A framework for developing causal credit default theories is introduced through the example of a new residential mortgage default theory. This theory overcomes many limitations of existing theories, solves several outstanding puzzles and integrates both micro and macroeconomic factors in a unified financial economic theory for mortgage default.

Keywords: causal framework; credit default risk; delinquency; insolvency; mortgage defualt (search for similar items in EconPapers)
JEL-codes: B41 C81 D14 E44 G21 G32 G33 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007-10-01
New Economics Papers: this item is included in nep-ban, nep-mac, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:204

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