Spurious Default Probability Projections in Credit Risk Stress Testing Models
SSRN Electronic Journal(2024)
摘要
Credit risk stress testing has become an important risk management device
which is used both by banks internally and by regulators. Stress testing is
complex because it essentially means projecting a bank's full balance sheet
conditional on a macroeconomic scenario over multiple years. Part of the
complexity stems from using a wide range of model parameters for, e.g., rating
transition, write-off rules, prepayment, or origination of new loans. A typical
parameterization of a credit risk stress test model specifies parameters linked
to an average economic, the through-the-cycle, state. These parameters are
transformed to a stressed state by utilizing a macroeconomic model. It will be
shown that the model parameterization implies a unique through-the-cycle
portfolio which is unrelated to a bank's current portfolio. Independent of the
stress imposed to the model, the current portfolio will have a tendency to
propagate towards the through-the-cycle portfolio. This could create unwanted
spurious effects on projected portfolio default rates especially when a stress
test model's parameterization is inconsistent with a bank's current portfolio.
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