Benchmarking forecast approaches for mortgage credit risk for forward periods

Thi Mai Luong and Harald Scheule

European Journal of Operational Research, 2022, vol. 299, issue 2, 750-767

Abstract: This paper explores alternative forecast approaches for mortgage credit risk for forward periods of up to seven years. Using data from US prime mortgage loans from 2000 to 2016, we find that common borrower, loan contract and external features are significant in explaining credit risk over forward periods. Time variation may come through the ageing and forward channel. We develop a hybrid model for predicting default probabilities that combines both channels and outperforms standalone alternatives. This higher precision results in more accurate economic capital, IFRS 9/CECL loan loss provisioning and mortgage pricing, and hence, a more efficient and resilient resource allocation in commercial banks.

Keywords: OR in banking; Forward model; Lifecycle model; Mortgage credit risk; Multi-period forecasts (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:299:y:2022:i:2:p:750-767

DOI: 10.1016/j.ejor.2021.09.026

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