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Stress testing retial loan portfolios with dual-time dynamics

Stress testing retial loan portfolios with dual-time dynamics
Stress testing retial loan portfolios with dual-time dynamics
Stress testing has become an important topic in retail lending since
the introduction of the new Basel II guidelines. The present work uses 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 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.
dual-time dynamics, nonlinear dynamics, time series analysis, portfolio forecasting, scenario-based forecasting, retail lending, stress testing, macroeconomic scenarios
CRR-07-15
University of Southampton
Breeden, J.L.
00dd4046-648c-4ac9-98b8-252fc05000c3
Thomas, L.
a3ce3068-328b-4bce-889f-965b0b9d2362
McDonald III, J.
c60d5597-20f7-4700-b983-3512deeec3cb
Breeden, J.L.
00dd4046-648c-4ac9-98b8-252fc05000c3
Thomas, L.
a3ce3068-328b-4bce-889f-965b0b9d2362
McDonald III, J.
c60d5597-20f7-4700-b983-3512deeec3cb

Breeden, J.L., Thomas, L. and McDonald III, J. (2007) Stress testing retial loan portfolios with dual-time dynamics (Discussion Papers in Centre for Risk Research, CRR-07-15) Southampton. University of Southampton 19pp.

Record type: Monograph (Discussion Paper)

Abstract

Stress testing has become an important topic in retail lending since
the introduction of the new Basel II guidelines. The present work uses 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 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.

Full text not available from this repository.

More information

Published date: July 2007
Keywords: dual-time dynamics, nonlinear dynamics, time series analysis, portfolio forecasting, scenario-based forecasting, retail lending, stress testing, macroeconomic scenarios

Identifiers

Local EPrints ID: 51694
URI: https://eprints.soton.ac.uk/id/eprint/51694
PURE UUID: 376e7add-8b30-46fb-9b7e-efd78729b5a3

Catalogue record

Date deposited: 21 Aug 2008
Last modified: 13 Mar 2019 20:48

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