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Using CPI in Loss Given Default Forecasting Models for Commercial Real Estate Portfolio
Forecasting the loss given default (LGD) for defaulted Commercial Real Estate (CRE) loans poses a significant challenge due to the extended resolution and workout time associated with such defaults, particularly in CCAR and CECL framework where the utilization of post-default information, including macroeconomic variables (MEVs) such as unemployment (UER) and various rates, is restricted.
An Exploration to the Correlation Structure and Clustering of Macroeconomic Variables
One of these interesting observations is that, for a list of 132 transformations derived from 44 targeted MEVs that cover 5 different aspects of the U. S. economy (which takes as a subset the 10+ key MEVs published by FRB), compared to benign years where there are typically 20-25 clusters, during the great financial crisis (GFC), i. e., 2007-2010, they exhibited a more synchronized and less diversified pattern of movement, forming roughly 15 clusters.
