Cyclical Factors Models

The Cyclical Factors (CF) Model, commonly referred to as the 'Z Score' model, is widely utilized in the financial industry for credit risk assessment. It provides key inputs for the IFRS 9 PD model, including cyclical factors and asset correlation factors (Merton R), which are based on the Vasicek Single Factor Model.

The Cyclical Factors Model calculates cyclical factors (Z Score) based on observed default rates. Using Ordinary Least Squared (OLS) regression, it establishes a relationship between the target variable (Z Score) and independent variables such as macroeconomic indicators (e.g., GDP, HPI) and sustainability factors (e.g., financed emissions, carbon price index). Once the regression equation is formed, it is used to predict the Z Score based on forecasted values of the independent variables across different macroeconomic scenarios.