Measurement of Farm Credit Risk: SUR Model and Simulation Approach

The study addresses problems in measuring credit risk under the structure model, and then proposes a seemingly unrelated regression model (SUR) to predict farms’ ability in meeting their current and anticipated obligations in the next 12 months. The empirical model accounts for both the dependence structure and the dynamic feature of the structure model, and is used for estimating asset correlation using FBFM data for 1995-2004. Farm credit risk is then predicted by copula based simulation process with historical default rates as benchmark. Results are reported and compared to previous studies on farm default.