Industry shocks and empirical evidences on defaults comovements

• It is commonly agreed that the credit defaults are correlated. However, the structure and magnitude of such dependence is not yet fully understood. This paper contributes to the current understanding about the defaults comovement in the following way. Assuming that the industries provides the basis of defaults comovement it provides empirical evidence as to how such comovements can be modeled using correlated industry shocks. Generalized linear mixed model (GLMM) with correlated random effects is used to model the defaults comovement. It is also demonstrated as to how a GLMM with complex correlation structure can be estimated through a very simple way. Empirical evidences are drawn through analyzing quarterly individual borrower level credit history data obtained from two major Swedish banks between the period 1994 and 2000. The results show that, conditional on the borrower level accounting data and macro business cycle variables, the defaults are correlated both within and between industries but not over time (quarters). A discussion has also been presented as to how a GLMM for defaults correlation can be explained.

Ämnesord

NATURVETENSKAP  -- Matematik -- Sannolikhetsteori och statistik (hsv//swe)

NATURAL SCIENCES  -- Mathematics -- Probability Theory and Statistics (hsv//eng)

Nyckelord

Credit risk

defaults contagion

GLMM

cluster correlation

SOCIAL SCIENCES

SAMHÄLLSVETENSKAP

Statistics

Statistik

Statistik

Statistics

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