An intensity-based non-parametric default model for residual mortgage portfolios
In June 2003 Swiss banks held over Sfr500 billion in mortgages. This important sector accounts for about 63% of all loan portfolios held by Swiss banks. Since default insurance is not common in Switzerland, the corresponding risks are a severe threat to the health of the financial system. We focus o...
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| Published in: | The journal of risk 2006-07, Vol.8 (4), p.57 |
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| Main Authors: | , |
| Format: | Article |
| Language: | eng |
| Subjects: | |
| Online Access: | Get full text |
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| Summary: | In June 2003 Swiss banks held over Sfr500 billion in mortgages. This important sector accounts for about 63% of all loan portfolios held by Swiss banks. Since default insurance is not common in Switzerland, the corresponding risks are a severe threat to the health of the financial system. We focus on the analysis of portfolios of residential mortgages and model the probability distribution of the number of defaults using a non-parametric approach, where the intensity processes associated with the time-to-default are linked to a set of predictors through general smooth functions. A generalized additive model is used to condition default intensities of mortgages on relevant economic risk drivers. We calibrate our model on a large mortgage servicing data set and compare the resulting loss distributions to a well-known benchmark - the loss distribution obtained from CreditRisk+ as commonly applied in the industry. The conditional loss distribution and risk measures for a large mortgage portfolio are shown to be highly sensitive to the prevailing socioeconomic conditions. [PUBLICATION ABSTRACT] |
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| ISSN: | 1465-1211 1755-2842 |