Global Business Cycles and Credit Risk

M Hashem Pesaran (), Til Schuermann () and Björn-Jakob Treutler

No 11493, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.

JEL-codes: C32 E17 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
Date: 2005-07
Note: AP CF
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Chapter: Global Business Cycles and Credit Risk (2007)
Working Paper: Global Business Cycles and Credit Risk (2005)
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