MODELLING DEPENDENCE BETWEEN GOVERNMENT DEBT AND BANK NON-PERFORMING LOANS, A COPULA APPROACH
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Date
2023-06
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THE CATHOLIC UNIVERSITY OF EASTERN AFRICA
Abstract
This study sought to model dependence between government debt and bank’s non-performing loans. The objectives of this study were to formulate a bivariate copula model which captures the dependence between government debt and bank non-performing loans and to measure the tail and asymmetric dependence between the two variables, the study used quarterly data sourced from World Bank. The data collection includes yearly observations for the following
emerging economies: Burundi, Central Africa, Chad, Kenya, Madagascar, Rwanda, and Seychelles; it also includes information on the government debt-to-GDP ratio. The sample spans the years 2010 through 2020.To model the dependence between debt and bank non-performing, different methods have been used. The study estimated the dependence using copula GARCH, an approach that combines copula functions and GARCH models. According to forming the effect of
local government debt and bank’s non-performing loans, copula models have been applied to analyze the asymmetry of tail dependence structure between government debt exposure and bank non-performing loans. We used R programming language and Excel to plot and analyze data. The results confirm that a large government debt in relation with non-performing loans has increased significantly from 2012 up to 2020, in all the countries apart of Seychelles. It showed that student t copula parameter provided the best fit for the marginal distributions. The results show the influence of government debt on bank non-performing loans. There appears to be a considerable association between the quick rise in bank non-performing loans and the extraordinary expansion of government debt, as indicated by the high and positive tail dependency. These nations’ larger tail dependency coefficients suggest that bank non-performing loans are more susceptible to the growth in public debt over the course of our sample period. Further researchers should focus on time to ensure the effectiveness of risk measurement and management.
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Keywords
Copula models, dependence modeling, government debt, non-performing loans (NPLs)