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Forecasting Credit Portfolio Risk
TLDR
In this paper, a Merton-style threshold-value model for the default probability is proposed, which treats the asset value of a firm as unknown and uses a factor model instead.Abstract:
The main challenge of forecasting credit default risk in loan portfolios is forecasting the default probabilities and the default correlations. We derive a Merton-style threshold-value model for the default probability which treats the asset value of a firm as unknown and uses a factor model instead. In addition, we demonstrate how default correlations can be easily modeled. The empirical analysis is based on a large data set of German firms provided by Deutsche Bundesbank. We find that the inclusion of variables which are correlated with the business cycle improves the forecasts of default probabilities. Asset and default correlations depend on the factors used to model default probabilities. The better the point-in-time calibration of the estimated default probabilities, the smaller the estimated correlations. Thus, correlations and default probabilities should always be estimated simultaneously.read more
Citations
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Book ChapterDOI
Unit Roots and Cointegration in Panels
Jörg Breitung,M. Hashem Pesaran +1 more
TL;DR: A review of the literature on unit roots and cointegration in panels where the time dimension (T) and the cross section dimension (N) are relatively large is provided in this paper.
Journal ArticleDOI
Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics
TL;DR: In this paper, the authors explore the links between credit risk and macroeconomic developments, and show that in periods of economic growth there may be some tendency towards excessive risk-taking, and that default probabilities are influenced by several firm-specific characteristics.
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Recursive robust estimation and control without commitment
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Tax Incentives and the Location of FDI: Evidence from a Panel of German Multinationals
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TL;DR: In this paper, the impact of taxation on the decision of German multinationals to hold or establish a subsidiary in other European countries or abroad was investigated using a firm-level panel data set.
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Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics
Diana Bonfim,Diana Bonfim +1 more
TL;DR: In this paper, the authors explore the links between credit risk and macroeconomic developments at an aggregate level and find that default probabilities are influenced by several firm-specific characteristics, such as their financial structure, profitability and liquidity, as well as by their recent sales performance or their investment policy.
References
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Forecasting Bankruptcy More Accurately: A Simple Hazard Model
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