GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 104 Topic 11 Discussion
2016-FRR Exam Topic 11 Question 104 Discussion:
Question #: 104
Topic #: 11
When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes
Herd behavior in the context of credit defaults refers to a situation where the stigma of default decreases, leading more borrowers to default as they see others doing the same. This creates a pattern of increasing defaults in the neighborhood as more borrowers follow the trend.
[References:, How Finance Works: "Defaults increasing as the stigma evaporates and more borrowers follow suit is indicative of herd behavior.", , ]
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