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arXiv · 2608.04469

Generalized Impulse Responses of Portfolio Default Probabilities: A Modular Framework with an Application to Geopolitical Risk

Guillaume Flament·Christophe Hurlin·Quentin Lajaunie·Yoann Pull
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Abstract

Credit stress testing requires impulse responses of portfolio default probabilities, not only macro-financial drivers. We derive closed-form generalized impulse responses for the mean, quantiles (PD-at-Risk), and expected shortfall in a modular framework combining a Bayesian VAR, a Gaussian satellite, and the Merton-Vasicek model underlying Basel IRB regulation. Results extend to any probit-Gaussian mapping of a latent factor. Nonlinearity makes responses depend on conditional means and variances; plug-in evaluations understate projected default probability levels by 6-8% and miss tail quantiles. For U.S. geopolitical risk shocks, 99%-quantile responses exceed mean responses by 50%, and peak responses vary 4.6-fold across the credit cycle.

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Guillaume Flament, Christophe Hurlin, Quentin Lajaunie, Yoann Pull. 2026-08-05. Generalized Impulse Responses of Portfolio Default Probabilities: A Modular Framework with an Application to Geopolitical Risk. https://arxiv.org/abs/2608.04469

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