Abstract:
Most studies focusing on the determinants of loss given default (LGD) have largely ignored possible lagged effects of the macroeconomy on LGD. We fill this gap by employing a wide set of macroeconomic covariates on a retail portfolio that represents 15% of the Czech consumer credit market over the period 2002-2012. We find an important time dimension to the links between LGD and the aggregate economy in the Czech Republic. The model that allows exclusively for contemporaneous effects includes a number of significant macroeconomic variables, some of which have non-intuitive signs. Nonetheless, a more general time structure of the LGD model makes current macroeconomic variables largely irrelevant and highlights the importance of delayed responses of LGD to the macroeconomic environment.
