Integrating macroeconomic risk factors in credit portfolio models

Alfred Hamerle, Andreas Dartsch, Rainer Jobst and Kilian Plank

Journal of Risk Model Validation

Abstract: ABSTRACT The recent financial crisis has shown the relevance of macroeconomic factors for forecasting and stress testing credit portfolio models. Despite this, most banks still work with a through-the-cycle approach. We show how to integrate macroeconomic variables into the risk management system of a bank using a multifactor credit risk model with observable macroeconomic and latent variables. In an empirical study, we compare the point-in-time results of this model with those of a through-the-cycle model and explain the deficiencies of the latter. We also provide a solution for the important case in which the bank's credit risk model includes no macroeconomic information so that macro-level stress tests and scenario analyses may be executed in a straightforward and consistent way.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ5:2161252

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