Prepared by Tom Pak-wing Fong, Research Department, Hong Kong Monetary Authority and Chun-shan Wong, Department of Finance, The Chinese University of Hong Kong

This paper estimates macroeconomic credit risk of banks’ loan portfolio based on a class of mixture vector autoregressive models. Such class of models can differentiate distributions of default rates and macroeconomic conditions for different market situations and can capture their dynamics evolving over time, including the feedback effect from an increase in fragility back to the macroeconomy. These extensions can facilitate the evaluation of credit risks of loan portfolio based on different credit loss distributions.

http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP13_08_full.pdf