Probability of default modelling using macroeconomic factors.

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2020

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Tokmak, Bahri

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As a consequence from the recent global financial crisis, regulatory frameworks are continuously improved in order to limit the banks’ risk exposure. Two of the amendments are Basel III and IFRS 9. Basel III regulates the capital a bank is required to hold while IFRS 9 is an accounting standard for how banks should classify their assets and estimate their future credit losses. Mutually for both Basel III and IFRS 9 is the estimation of future credit losses which include the probability of default in the calculations. The objective of this thesis is, therefore, to evaluate the relationship between the Probability of Default (PD) of small and medium enterprises and households with the evolution of the macroeconomic environment. This work contributes to the literature of credit risk proving the importance of macroeconomic variables in determining the PDs both for the sector of non-financial corporations and sector of households in Turkey. Evaluation of a long-run impact and short-run dynamics of the macro variables on the PDs are investigated by employing ARDL bound testing approach on quarterly data of probability of default ratio and other macroeconomic variables covering the period 2007:1-2018:4. The results of the ARDL bound tests suggest the probability of default is significantly impressed especially by interest rates, unemployment, inflation, reel exchange rates, volatility index (VIX) and economic growth rates. The estimated long-run relationships are found to be consistent with economic theory.

Subject Keywords

Macroeconomics., Basel III, IFRS 9, Probability of Default, Credit Portfolio View, ARDL Bound Test.

URI

http://etd.lib.metu.edu.tr/upload/12625124/index.pdf
https://hdl.handle.net/11511/45548

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Graduate School of Social Sciences, Thesis

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Citation Formats

B. Tokmak, “Probability of default modelling using macroeconomic factors.,” Thesis (M.S.) -- Graduate School of Social Sciences. Economics., Middle East Technical University, 2020.