Doctoral thesis

Loan default rates in the great recession

Stochastic Volatility and Regime Switching for Consumer Loan Loss Dynamics: The majority of the empirical studies in the fields of Finance and Econometric focus on asset pricing an ...

Author(s) :

Kai Wing Chan, PhD

Vice President, Risk Manager at Wells Fargo (USA)

Abstract :

Stochastic Volatility and Regime Switching for Consumer Loan Loss Dynamics: The majority of the empirical studies in the fields of Finance and Econometric focus on asset pricing and interest rate. Related studies on bank’s lending portfolio loan losses are lacking. In this study, I propose using a discrete-time stochastic volatility model with regime switching to fit the loss dynamics of the consumer lending portfolios over the last two decades to cover the dot-com and the housing market driven recessions.

The Comovement of Consumer and Business Loan Defaults: Businesses drive the economy by providing jobs and investing in capital goods and new technology. Yet, consumer expenditures represent 70 percent of gross domestic product and are the ultimate measure of the economic growth. Their close tie is indubitable. How would commercial banks, being the primary supply source of consumer and business credits, develop prudent risk management policies to maintain solvency through economic cycles given the significant presences of consumer and business loans in their portfolios? This is a particularly important question as the recent economic meltdown had led to devastating financial losses throughout the commercial banking industry. The present study utilizes cointegration analysis to examine the existence of stable long-run relationships among the default rates and the determinants. From specific to general, this paper provides evidence that default risks are cointegrated. The first long-run relation, financial hardship, calls for the danger in disregarding the real estate risk in understanding the comovement between consumer and business default risks. The second (liquidity risk of real estate) and third (consumer strategic default) relations showcase the dynamics that are made apparent in the latest recession.

Date : 24/06/2014
Thesis Committee :

Supervisor: Giuseppe Bertola, EDHEC Business School

External reviewer:  Anindya Banerjee, University of Birmingham

Other committee member: Stéphane Gregoir, EDHEC Business School

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