Loan portfolio conditional loss estimation using an error-correcting macroeconometric model

Abstract

Credit portfolio managers must be able to identify the interdependencies between exposures in a portfolio and be able to relate credit risk to tangible portfolio effects on which action could be taken. To these ends, this paper draws on the macroeconometric vector error correcting model (VECM) developed by De Wet et al. (2009) and applies the proposed methodology of Pesaran, Schuermann, Treutler and Weiner (2006) to a dummy credit portfolio within the South African economy. It illustrates the ability to link macroeconomic factors to a credit portfolio, that scenario analysis can be performed and that portfolio management and value enhancing applications can be pursued.