Retail credit stress testing using a discrete hazard model with macroeconomic factors

Tony Bellotti, Jonathan Crook

Research output: Journal PublicationArticlepeer-review

20 Citations (Scopus)

Abstract

Retail credit models are implemented using discrete survival analysis, enabling macroeconomic conditions to be included as time-varying covariates. In consequence, these models can be used to estimate changes in probability of default given downturn economic scenarios. Compared with traditional models, we offer improved methodologies for scenario generation and for the use of them to predict default rates. Monte Carlo simulation is used to generate a distribution of estimated default rates from which Value at Risk and Expected Shortfall are computed as a means of stress testing. Several macroeconomic variables are considered and in particular factor analysis is employed to model the structure between these variables. Two large UK data sets are used to test this approach, resulting in plausible dynamic models and stress test outcomes.

Original languageEnglish
Pages (from-to)340-350
Number of pages11
JournalJournal of the Operational Research Society
Volume65
Issue number3
DOIs
Publication statusPublished - Mar 2014
Externally publishedYes

Keywords

  • banking
  • credit scoring
  • finance
  • stress testing

ASJC Scopus subject areas

  • Management Information Systems
  • Strategy and Management
  • Management Science and Operations Research
  • Marketing

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