#03-13-B
"Macroeconomic Dynamics and Credit Risk: A Global Perspective"
Til Schuermann, Björn-Jakob Treutler, Scott M. Weiner, April 2005
Abstract: This paper presents a new approach to modeling conditional credit loss distributions. Asset value
changes of firms in a credit portfolio are linked to a dynamic global macroeconometric model, allowing
macro effects to be isolated from idiosyncratic shocks from the perspective of default (and hence loss).
Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and
foreign, and how business cycles are linked across countries. We allow for firm-specific business cycle
effects and the heterogeneity of firm default thresholds using credit ratings. The model can be used, for
example, to compute the effects of a hypothetical negative equity price shock in South East Asia on the
loss distribution of a credit portfolio with global exposures over one or more quarters. We show that the
effects of such shocks on losses are asymmetric and non-proportional, reflecting the highly non-linear
nature of the credit risk model.
Keywords: Risk management, economic interlinkages, loss forecasting, default correlation
JEL Codes: C32, E17, G20
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