Are Default Rate Time Series Stationary? A Practical Approach for Banking Experts

Gabor Szigel () and Boldizsar Istvan Gyurus ()
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Gabor Szigel: OTP Bank Nyrt
Boldizsar Istvan Gyurus: OTP Bank Nyrt

Financial and Economic Review, 2023, vol. 22, issue 4, 107-135

Abstract: As the IFRS 9 accounting standard requires banks to recognise impairments based on a forward-looking expected loss concept, banks must estimate the quantitative relationship between default rates and macroeconomic indicators (GDP, unemployment, etc.). In such models, the stationarity of the (usually short) default rate time series is often the most critical issue. In this article, we provide practical advice for banking experts on how (under which circumstances) they can still use short default rate time series in OLS regressions even if those fail regular stationarity tests. We argue that if margin of conservativism is requested for the underlying default rate projections, then applying (seemingly) non-stationary default rate time series in OLS models might not necessarily be problematic.

Keywords: default rates; probability of default; stationarity; time series analysis (search for similar items in EconPapers)
JEL-codes: C22 C53 G21 G32 (search for similar items in EconPapers)
Date: 2023
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