Template-Type: ReDIF-Article 1.0

Author-Name: Gabor Szigel
Author-Workplace-Name: OTP Bank Nyrt
Author-Email: gabor.tamas.szigel@otpbank.hu
Author-Person: 

Author-Name: Boldizsar Istvan Gyurus
Author-Workplace-Name: OTP Bank Nyrt
Author-Email: boldizsar.istvan.gyurus@otpbank.hu
Author-Person:

Title: Are Default Rate Time Series Stationary? A Practical Approach for Banking Experts

Abstract: As the IFRS 9 accounting standard requires banks to recognise impairments
based on a forward-looking expected loss concept, banks must estimate the
quantitative relationship between default rates and macroeconomic indicators
(GDP, unemployment, etc.). In such models, the stationarity of the (usually short)
default rate time series is often the most critical issue. In this article, we provide
practical advice for banking experts on how (under which circumstances) they can
still use short default rate time series in OLS regressions even if those fail regular
stationarity tests. We argue that if margin of conservativism is requested for the
underlying default rate projections, then applying (seemingly) non-stationary default
rate time series in OLS models might not necessarily be problematic.

Classification-JEL: C22, C53, G21, G32
Keywords: default rates, probability of default, stationarity, time series analysis
Pages: 107-135
Volume: 22
Issue: 4
Year: 2023
File-URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-22-4-st4-szigel-gyurus.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:22:y:2023:i:4:p:107-135