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A Method of Retail Mortgage Stress Testing: Based on Time‐Frame and Magnitude Analysis
Author(s) -
Liu Chang,
Nassar Raja,
Guo Min
Publication year - 2015
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2326
Subject(s) - autoregressive model , markov chain , portfolio , stress test , econometrics , computer science , stress testing (software) , shock (circulatory) , economics , finance , machine learning , medicine , programming language
In this study, a non‐stationary Markov chain model and a vector autoregressive moving average with exogenous variables coupled with a logistic function (VARMAX‐L) are used to analyze and predict the stability of a retail mortgage portfolio, based on the stress test framework. The method introduced in this paper can be used to forecast the transition probabilities in a retail mortgage over pre‐specified states, given a shock with a certain magnitude. Hence this method provides a dynamic picture of the portfolio transition process through which one can assess its behavior over time. While the paper concentrates on retail mortgages, the methodology of this study can be adapted also to analyze other credit products in banks. Copyright © 2015 John Wiley & Sons, Ltd.