TY  - JOUR
AU  - Pesaran, M. Hashem
AU  - Schuermann, Til
AU  - Treutler, Björn-Jakob
TI  - Global Business Cycles and Credit Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11493
PY  - 2005
Y2  - July 2005
DO  - 10.3386/w11493
UR  - http://www.nber.org/papers/w11493
L1  - http://www.nber.org/papers/w11493.pdf
N1  - Author contact info:
M. Hashem Pesaran
University of Southern California
Department of Economics
3620 South Vermont Avenue  
Los Angeles, CA 90089
E-Mail: pesaran@usc.edu

Til Schuermann
Federal Reserve Bank of New York
33 Liberty Street
New York, NY  10045
E-Mail: til.schuermann@gmail.com

Bjorn-Jakob Treutler
Mercer Oliver Wyman
E-Mail: no email available
M1  - published as M. Hashem Pesaran, Til Schuermann, Bjorn-Jakob Treutler. "Global Business Cycles and Credit Risk," in Mark Carey and René M. Stulz, editors, "The Risks of Financial Institutions" University of Chicago Press (2006)

AB  - The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors.  Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions.  We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions.  These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity.  Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity.  The regional model also exhibits less shock sensitivity.
ER  -