Global business cycles and credit risk
By: M. Hashem Pesaran, Til Schuermann, Björn-Jakob Treutler.
Contributors: Schuermann, Til.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11493; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11493.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Portfolio management -- Mathematical models.; Risk management -- Mathematical models.; Business cycles -- Mathematical models.; International finance -- Mathematical models.
Description: "The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors.  Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions.  We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions.  These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity.  Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity.  The regional model also exhibits less shock sensitivity"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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