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- Title
Incorporating Climate Risk into Credit Risk Modeling: An Application in Housing Finance.
- Authors
Lefevre, Alexandra; Tourin, Agnes
- Abstract
This paper examines the integration of climate risks into structural credit risk models. We focus on applications in housing finance and argue that mortgage defaults due to climate disasters have different statistical features than default due to household-specific reasons. We propose two models incorporating climate risk based on two separate default definitions. The first focuses on default as a response to a decrease in home value, and the second defines default as a consequence of missed mortgage payments. Using mortgage performance data during Hurricane Harvey, we conduct an empirical study whose results suggest that climate events are potentially another source of undiversifiable credit risk affecting homeowners' ability to make contractual monthly payments. We also show that incorporating this climate-specific default process may capture additional uncertainty in default probability assessments.
- Subjects
CREDIT risk; HOUSING finance; MORTGAGE loan default; HURRICANE Harvey, 2017; DEFAULT (Finance)
- Publication
FinTech, 2023, Vol 2, Issue 3, p614
- ISSN
2674-1032
- Publication type
Article
- DOI
10.3390/fintech2030034