COVID-19, Credit Risk and Macro Fundamentals

Tinbergen Institute Discussion Paper 2021-059/III

32 Pages Posted: 30 Jun 2021

See all articles by Anna Dubinova

Anna Dubinova

VU University Amsterdam

Andre Lucas

Vrije Universiteit Amsterdam; Tinbergen Institute

Sean Telg

Maastricht University - Department of Quantitative Economics

Date Written: June 28, 2021

Abstract

We investigate the relationship between macro fundamentals and credit risk, rating migrations and defaults during the start of the COVID-19 pandemic. We find that credit risk models that use macro fundamentals as covariates overestimate credit risk incidence due to the unprecedented drops in economic activity in the first lockdowns. We argue that this break in the macro-credit linkage is less affected if we take an unobserved components modeling framework, both at shorter and longer credit risk horizons.

Keywords: COVID-19, credit risk, macro fundamentals, frailty factors, dynamic latent factors

JEL Classification: G21, C22

Suggested Citation

Dubinova, Anna and Lucas, Andre and Telg, Sean, COVID-19, Credit Risk and Macro Fundamentals (June 28, 2021). Tinbergen Institute Discussion Paper 2021-059/III, Available at SSRN: https://ssrn.com/abstract=3875628 or http://dx.doi.org/10.2139/ssrn.3875628

Anna Dubinova

VU University Amsterdam

Netherlands

Andre Lucas

Vrije Universiteit Amsterdam ( email )

SBE/EDS, De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

Sean Telg (Contact Author)

Maastricht University - Department of Quantitative Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.maastrichtuniversity.nl/j.telg

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