Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153892
Authors: 
Koopman, Siem Jan
Lucas, André
Schwaab, Bernd
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper 1459
Abstract: 
We develop a high-dimensional and partly nonlinear non-Gaussian dynamic factor model for the decomposition of systematic default risk conditions into a set of latent components that correspond with macroeconomic/financial, default-specific (frailty), and industry-specific effects. Discrete default counts together with macroeconomic and financial variables are modeled simultaneously in this framework. In our empirical study based on defaults of U.S. firms, we find that approximately 35 percent of default rate variation is due to systematic and industry factors. Approximately one third of systematic variation is captured by macroeconomic/financial factors. The remainder is captured by frailty (about 40 percent) and industry (about 25 percent) effects. The default-specific effects are particularly relevant before and during times of financial turbulence. For example, we detect a build-up of systematic risk over the period preceding the 2008 credit crisis.
Subjects: 
credit portfolio models
default risk
financial crisis
frailty-correlated defaults
state space methods
JEL: 
C33
G21
Document Type: 
Working Paper

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