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Stress-Testing Retail Loan Portfolios with Dual-Time Dynamics
Company: Journal of Risk Model Validation
Year Of Publication: 2008
Month Of Publication: June
Resource Link: Click here to open
Pages: 43-62
Download Count: 0
View Count: 1647
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 5-13-2012
Publisher: Administrator
Stress-testing has become an important topic in retail lending since the introduction of the new Basel II guidelines. Here we use a scenario-based forecasting approach developed explicitly for retail lending in order to provide a suitable stress-testing approach. We first decompose the historical vintage performance data into a maturation function of months-on-books, a quality function of vintage origination date and an exogenous function of calendar date. In a second step, the exogenous function is modeled with macroeconomic data or factors representing portfolio management impacts. Stress tests are performed by extrapolating the exogenous function using externally provided scenarios for extreme macroeconomic events. The resulting scenario is combined with the known maturation and quality functions. This process is repeated for each member of a key set of rates, such as default rate, exposure at default and loss given default in the context of Basel II. These key rate forecasts are combined to create total portfolio forecasts and stress tests. This approach is demonstrated in an analysis of the US mortgage markets.
(volume 2, numb
Breeden, Joseph L. Sign in to follow this author
Thomas, Lyn Sign in to follow this author
McDonald, John W., III Sign in to follow this author
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