EconPapers    
Economics at your fingertips  
 

Macro Stress Testing of Credit Risk Focused on the Tails

Ricardo Schechtman and Wagner Gaglianone ()

No 241, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper investigates macro stress testing of system-wide credit risk with special focus on the tails of the credit risk distributions conditional on bad macroeconomic scenarios. These tails determine the ex-post solvency probabilities derived from the scenarios. This paper estimates the macro-credit risk link by the traditional Wilson (1997) model as well as by an alternative proposed quantile regression (QR) method (Koenker and Xiao, 2002), in which the relative importance of the macro variables can vary along the credit risk distribution, conceptually incorporating uncertainty in default correlations. Stress-testing exercises on the Brazilian household sector at the one-quarter horizon indicate that unemployment rate distress produces the most harmful effect, whereas distressed inflation and distressed interest rate show higher impacts at longer periods. Determining which of the two stress-testing approaches perceives the scenarios more severely depends on the type of comparison employed. The QR approach is revealed more conservative based on a suggested comparison of vertical distances between the tails of the conditional and unconditional credit risk cumulative distributions.

Date: 2011-05
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

Downloads: (external link)
https://www.bcb.gov.br/pec/wps/ingl/wps241.pdf (application/pdf)

Related works:
Journal Article: Macro stress testing of credit risk focused on the tails (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:241

Access Statistics for this paper

More papers in Working Papers Series from Central Bank of Brazil, Research Department
Bibliographic data for series maintained by Francisco Marcos Rodrigues Figueiredo ().

 
Page updated 2020-10-26
Handle: RePEc:bcb:wpaper:241