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VECM approach for default rate forecasting
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Resumo(s)
This research explores the application of a Vector Error Correction Model (VECM)
in forecasting Default Rates, using key macroeconomic indicators such as Gross
Domestic Product, inflation and unemployment rates. The VECM was selected due to its
ability to deal with non-stationary cointegrated variables, allowing it to capture both the
short-term dynamics and the long-term equilibrium relationships between the variables.
The forecasted Default Rate is a critical variable in the estimation of the Variable
Scalar Approach. Under IFRS 9, this approach adjusts Through-the-Cycle Probabilities
of Default into Point-in-Time Probabilities of Default, allowing the inclusion of forwardlooking macroeconomic indicators in the Probability of Default estimate, thereby
enhancing financial institutions' ability to estimate Expected Credit Losses and internal
capital requirements.
The study finds that the VECM provided reasonably accurate forecasts for default
rates during the period considered, with minimal deviations from the observed data, all
within an acceptable range. While diagnostic tests confirmed the model's robustness and
reliability, limitations were observed in its ability to predict extreme economic events,
particularly during financial crises such as those of 2009 and 2020. To address this
limitation, a worst-case scenario is incorporated into the scalar factor calculation. Despite
these challenges, the model has proven to be a valuable tool for enhancing credit risk
management.
Descrição
Palavras-chave
Default Rate Probability of Default Vector Error Correction Model Variable Scalar Approach
Contexto Educativo
Citação
Neves, Hugo Filipe Lourenço (2024). “VECM approach for default rate forecasting”. Dissertação de Mestrado. Universidade de Lisboa. Instituto Superior de Economia e Gestão
Editora
Instituto Superior de Economia e Gestão