COVID-19, Credit Risk and Macro Fundamentals
Tinbergen Institute Discussion Paper 2021-059/III
32 Pages Posted: 30 Jun 2021
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: Suggested Citation