A quantile probability model for sectoral corporate defaults in Europe

Paul Konietschke, Julian Metzler and Aurea Ponte Marques

No 3207, Working Paper Series from European Central Bank

Abstract: Conventional credit risk models understate tail risk by centering on mean default probabilities and neglecting distributional and sectoral heterogeneity. We propose a Quantile Probability of Default (QPD) framework based on unconditional quantile regressions estimated on flow default rates from five million non-financial firms across nine countries, conditioned on macro- and sectoral scenario covariates standard in stress testing. The tail exhibits three- to five-fold stronger sensitivity than at the median, revealing non-linearities and asymmetric sectoral propagation of credit risk. We validate the performance of our model across crisis periods and benchmark models to confirm the framework’s robustness and prudential efficiency. Under the European Central Banks’s 2025 increasing geopolitical and trade tensions scenario, the QPD identifies higher tail vulnerabilities in construction, trade, hospitality, and real estate. The framework embeds distributional estimation into stress testing, advancing scenario-based assessment of sectoral credit risk for policy and prudential applications. JEL Classification: C21, C54, D22, G21, G32

Keywords: firm dynamics; non-linearity; probability of default; stress testing; trade tension (search for similar items in EconPapers)
Date: 2026-03
Note: 3594456
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263207

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