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Accuracy of mortgage portfolio risk forecasts during financial crises

Yongwoong Lee, Daniel Rösch and Harald Scheule

European Journal of Operational Research, 2016, vol. 249, issue 2, 440-456

Abstract: This paper explores whether factor based credit portfolio risk models are able to predict losses in severe economic downturns such as the recent Global Financial Crisis (GFC) within standard confidence levels. The paper analyzes (i) the accuracy of default rate forecasts, and (ii) whether forecast downturn percentiles (Value-at-Risk, VaR) are sufficient to cover default rate outcomes over a quarterly and an annual forecast horizon. Uninformative maximum likelihood and informative Bayesian techniques are compared as they imply different degrees of uncertainty.

Keywords: Bayesian estimation; Maximum likelihood estimation; Model risk; Mortgage; Value-at-risk (search for similar items in EconPapers)
Date: 2016
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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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Handle: RePEc:eee:ejores:v:249:y:2016:i:2:p:440-456