One-factor model for default rates by loan type
This paper investigates the link between default rates by loan types and the systemic credit risk component. This link is described by a linear model that combines systemic and idiosyncratic contributions. The systemic component is a latent factor that depends directly on the aggregate loan default...
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Association of Serbian Banks
2021
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oai:doaj.org-article:f4324635bab1415fbdd901acf4dd8e4c2021-12-05T18:01:57ZOne-factor model for default rates by loan type1451-43542466-549510.5937/bankarstvo2102088Bhttps://doaj.org/article/f4324635bab1415fbdd901acf4dd8e4c2021-01-01T00:00:00Zhttps://scindeks-clanci.ceon.rs/data/pdf/1451-4354/2021/1451-43542102088B.pdfhttps://doaj.org/toc/1451-4354https://doaj.org/toc/2466-5495This paper investigates the link between default rates by loan types and the systemic credit risk component. This link is described by a linear model that combines systemic and idiosyncratic contributions. The systemic component is a latent factor that depends directly on the aggregate loan default rate, while the idiosyncratic component drives specific variations of default rates across loan types. By transforming observable risk measures, the model can be econometrically represented as a mixed-effects model, where the systemic and idiosyncratic components represent, respectively, the slope and the intercept that are specific for each loan type individually. The proposed model is illustrated on a panel of defaulted loans of the Association of Serbian Banks. The obtained results show the model's very high power in explaining average default rates for all loan types. Thus, the aggregate default rate plays the role of a unique systemic component that mimics the influence of fundamental macroeconomic risk factors easily, without the necessity to model this relationship explicitly.Božović MilošAssociation of Serbian Banksarticlecredit riskdefault ratesystemic factorsmixed-effects modelFinanceHG1-9999ENSRBankarstvo, Vol 50, Iss 2, Pp 88-100 (2021) |
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DOAJ |
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DOAJ |
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EN SR |
| topic |
credit risk default rate systemic factors mixed-effects model Finance HG1-9999 |
| spellingShingle |
credit risk default rate systemic factors mixed-effects model Finance HG1-9999 Božović Miloš One-factor model for default rates by loan type |
| description |
This paper investigates the link between default rates by loan types and the systemic credit risk component. This link is described by a linear model that combines systemic and idiosyncratic contributions. The systemic component is a latent factor that depends directly on the aggregate loan default rate, while the idiosyncratic component drives specific variations of default rates across loan types. By transforming observable risk measures, the model can be econometrically represented as a mixed-effects model, where the systemic and idiosyncratic components represent, respectively, the slope and the intercept that are specific for each loan type individually. The proposed model is illustrated on a panel of defaulted loans of the Association of Serbian Banks. The obtained results show the model's very high power in explaining average default rates for all loan types. Thus, the aggregate default rate plays the role of a unique systemic component that mimics the influence of fundamental macroeconomic risk factors easily, without the necessity to model this relationship explicitly. |
| format |
article |
| author |
Božović Miloš |
| author_facet |
Božović Miloš |
| author_sort |
Božović Miloš |
| title |
One-factor model for default rates by loan type |
| title_short |
One-factor model for default rates by loan type |
| title_full |
One-factor model for default rates by loan type |
| title_fullStr |
One-factor model for default rates by loan type |
| title_full_unstemmed |
One-factor model for default rates by loan type |
| title_sort |
one-factor model for default rates by loan type |
| publisher |
Association of Serbian Banks |
| publishDate |
2021 |
| url |
https://doaj.org/article/f4324635bab1415fbdd901acf4dd8e4c |
| work_keys_str_mv |
AT bozovicmilos onefactormodelfordefaultratesbyloantype |
| _version_ |
1718371273832136704 |