Global Macro-Financial Shocks and expected default frequencies in the Euro area

Olli Castrén (), Stephane Dees () and Fadi Zaher
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Olli Castrén: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 875, Working Paper Series from European Central Bank

Abstract: Modelling the link between the global macro-financial factors and firms’ default probabilities constitutes an elementary part of financial sector stress-testing frameworks. Using the Global Vector Autoregressive (GVAR) model and constructing a linking satellite equation for the firm-level Expected Default Frequencies (EDFs), we show how to analyse the euro area corporate sector probability of default under a wide range of domestic and foreign macroeconomic shocks. The results show that, at the euro area aggregate level, the median EDFs react most to shocks to the GDP, exchange rate, oil prices and equity prices. There are some intuitive variations to these results when sector-level EDFs are considered. Overall, the Satellite-GVAR model appears to be a useful tool for analysing plausible global macrofinancial shock scenarios designed for financial sector stress-testing purposes. JEL Classification: C33, F47, G32, G33.

Keywords: Credit risk; Global VAR; corporate default probability; macro stress testing. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-eec, nep-mac and nep-opm
Date: 2008-02
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