Credit Loss Analysis of Macroeconomic Factor
Research Article
Open Access
CC BY

Credit Loss Analysis of Macroeconomic Factor

Bowen Zhang 1*
1 University of Rochester
*Corresponding author: Bzhang41@u.rochester.edu
Published on 11 July 2025
Volume Cover
AEMPS Vol.201
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-80590-259-1
ISBN (Online): 978-1-80590-260-7
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Abstract

This paper analyzes credit loss under different LTV/DTI settings. By running various macroeconomic variables from current and previous periods, a VAR model simulates 360,000 scenarios with different LTV/DTI pairs over 360 periods. Using a cutoff, the research determines how many scenarios present a high risk of default and examines whether this aligns with theoretical expectations. Comparing the credit analysis results, the study finds that higher LTV significantly increases credit losses. This corresponds with the theoretical understanding that higher LTV indicates lower down payment for borrowers, thereby reducing the cost of default. Borrowers lack strong motivation to maintain repayments and are more likely to default when confronting financial difficulties. The research demonstrates that when LTV reaches a high level, increases in DTI lead to greater credit losses. Conversely, when LTV is low, rising DTI does not substantially impact credit performance.

Keywords:

Credit Loss, Macroeconomic Factor, LTVs, DTIs, VAR model

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Zhang,B. (2025). Credit Loss Analysis of Macroeconomic Factor. Advances in Economics, Management and Political Sciences,201,20-28.

References

[1]. Chernov, M., Dunn, B. R., & Longstaff, F. A. (2018). Macroeconomic-driven prepayment risk and the valuation of mortgage-backed securities. The Review of Financial Studies, 31(3), 1132-1183.

[2]. Ambrose, B. W., & Sanders, A. B. (2003). Commercial mortgage-backed securities: prepayment and default. The Journal of Real Estate Finance and Economics, 26, 179-196.

[3]. Campbell, J. Y., Clara, N., & Cocco, J. F. (2021). Structuring mortgages for macroeconomic stability. The Journal of Finance, 76(5), 2525-2576.

[4]. Vickery, J. (2007). Interest rates and consumer choice in the residential mortgage market. Working paper.

[5]. Campbell, J. Y., & Cocco, J. F. (2015). A model of mortgage default. The Journal of Finance, 70(4), 1495-1554.

[6]. Schwartz, E. S., & Torous, W. N. (1992). Prepayment, default, and the valuation of mortgage pass-through securities. Journal of Business, 221-239.

[7]. Atlas, S. A., Johnson, E. J., & Payne, J. W. (2017). Time preferences and mortgage choice. Journal of Marketing Research, 54(3), 415-429.

[8]. Baker, H. K., Filbeck, G., & Spieler, A. C. (Eds.). (2019). Debt markets and investments. Oxford University Press.

References

[1]. Chernov, M., Dunn, B. R., & Longstaff, F. A. (2018). Macroeconomic-driven prepayment risk and the valuation of mortgage-backed securities. The Review of Financial Studies, 31(3), 1132-1183.

[2]. Ambrose, B. W., & Sanders, A. B. (2003). Commercial mortgage-backed securities: prepayment and default. The Journal of Real Estate Finance and Economics, 26, 179-196.

[3]. Campbell, J. Y., Clara, N., & Cocco, J. F. (2021). Structuring mortgages for macroeconomic stability. The Journal of Finance, 76(5), 2525-2576.

[4]. Vickery, J. (2007). Interest rates and consumer choice in the residential mortgage market. Working paper.

[5]. Campbell, J. Y., & Cocco, J. F. (2015). A model of mortgage default. The Journal of Finance, 70(4), 1495-1554.

[6]. Schwartz, E. S., & Torous, W. N. (1992). Prepayment, default, and the valuation of mortgage pass-through securities. Journal of Business, 221-239.

[7]. Atlas, S. A., Johnson, E. J., & Payne, J. W. (2017). Time preferences and mortgage choice. Journal of Marketing Research, 54(3), 415-429.

[8]. Baker, H. K., Filbeck, G., & Spieler, A. C. (Eds.). (2019). Debt markets and investments. Oxford University Press.

Cite this article

Zhang,B. (2025). Credit Loss Analysis of Macroeconomic Factor. Advances in Economics, Management and Political Sciences,201,20-28.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

About volume

Volume title: Proceedings of ICEMGD 2025 Symposium: Digital Transformation in Global Human Resource Management

ISBN: 978-1-80590-259-1(Print) / 978-1-80590-260-7(Online)
Editor: Florian Marcel Nuţă Nuţă, An Nguyen
Conference website: https://www.icemgd.org/committee.html
Conference date: 26 September 2025
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.201
ISSN: 2754-1169(Print) / 2754-1177(Online)

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