Threshold effects in credit risk and stress scenarios

This paper focuses on the analysis and modelling of credit risk, measured through the value of nonperforming loans. Taking into account the new regulatory framework introduced by Basel II, possible stress scenarios in the context of Pillar 2 are also identified. The analysis is conducted for three countries-Portugal, Spain and Italy. The null hypothesis of linearity is rejected for all three countries, for both the self-exciting threshold autoregressive (SETAR) and threshold autoregressive (TAR) alternatives, and this feature is taken into account when credit risk is modelled, making SETAR and TAR models a plausible alternative to linear models. Copyright (C) 2010 John Wiley & Sons, Ltd.