Credit risk stress testing: The Portuguese environment, macroeconomic scenarios and the estimation of losses for corporate sectors

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

This study focuses on the development of a macroeconomic credit risk model for the prediction of corporate default rates, conditional on the observed economic environment. Data relative to the Portuguese economy was utilized for the development of the model, regarding the period from 2002 to 2012. The results suggest a clear link between macroeconomic factors, such as GDP, interest rates, unemployment and corporate indebtness, to the default rates observed. Furthermore, the introduction of a Merton-based analysis of the loss distributions permitted the analysis of expected and unexpected losses, alongside Basel II capital requirement evolutions.