Sustainable economies: Using a macro-economic model to predict how the default rate is affected under economic stress scenarios. (2020)

• Record Type: Journal Article
• Authors: Baltazar, José; Reis, João; Amorim, Marlene
• Is Part Of: Sustainable futures. Volume 2(2020)
• Publication Date: 2020
• Subjects: Stress testing -- 2008 financial crisis -- Macro-economic models -- Default rate; Sustainability -- Periodicals; Sustainable development -- Periodicals; Green technology -- Periodicals; 338.92705
• DOI: 10.1016/j.sftr.2020.100011
• Languages: English
• ISSNs: 2666-1888

Abstract

Abstract: This article aims to calculate the quarterly default rate of customers loans in the UK for different simulated stress-scenarios based on a macro-economic model. These simulations are from Q1 2019 until Q4 2023. The simulated default rates are compared to default rates from the 2007–2009 crisis. In addition to this, the uplift, elasticity and level of extremeness of a simulated default rate were also computed. This paper employed a systematic literature review methodology in order to gather knowledge about the available literature about the topic. The data analysis component of this project was divided into three different parts: 1) Monte Carlo simulations were used in order to simulate stress macro-economic conditions, 2) back-transformation was employed in order to calculate the default rate, which was calculated in function of the macro-economic variables, 3) a visualisation dashboard containing the results, built using R Shiny. Scenarios 1, 2 and 3 show a 30%, 3%, and 4% default rate increase, respectively, between Q4 2023 and the 2007–2009 economic crisis. Our research might be relevant for banks and stakeholders to assess how certain scenarios will affect the default rate and the macro-economic environment for sustainable economies. Furthermore, the findings can be used to validate or invalidate macro-economic models.