An extendable, integrated, and dynamic approach to forecasting and stress-testing credit risk (opens in new tab)

An integrated and extendable approach for stress-testing loan portfolios is presented, which includes both a loan production component and a credit risk component. In this approach, we simulate a completed portfolio using realistic loan parameters and distributional assumptions. Thereafter, we generate the uncertain cash flow history of these loans within a multistate probabilistic framework. We illustrate our approach using a simulation-based...