I will be attending CFE 2009 in Cyprus and will present the following paper.
An exercise in stress testing for retail credit cards
Tony Bellotti and Jonathan Crook
Abstract
Stress tests are becoming increasingly important for evaluating consumer credit risk and they are recognised as a key tool in helping financial institutions make business strategy, risk management and capital planning decisions. We present a simulation-based method for stress testing using discrete survival analysis to build a dynamic model of default at the account level which includes macroeconomic conditions as risk factors. We discuss methods to generate plausible but extreme economic simulations within this framework and apply Monte Carlo simulation to compute empirical distributions of estimated default rates. We present experimental results for a large data set of UK credit card accounts that show that bank interest rates, production index, retails sales index and the FTSE 100 index are all statistically significant systemic risk factors for default. Stress tests using this model generate right skewed distributions of default rates and yield plausible extreme values of risk as measured by Value at Risk and expected shortfall. Finally we discuss statistical validation of stress tests through back-test of the loss distribution.
