EconPapers    
Economics at your fingertips  
 

Mortgages: estimating default correlation and forecasting default risk

Tobias Neumann ()
Additional contact information
Tobias Neumann: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 708, Bank of England working papers from Bank of England

Abstract: Default correlation is a key driver of credit risk. In the Basel regulatory framework it is measured by the asset value correlation parameter. Though past studies suggest that the parameter is over-calibrated for mortgages — generally the largest asset class on banks’ balance sheets — they do not take into account bias arising from small samples or non-Gaussian risk factors. Adjusting for these biases using a non-Gaussian, non-linear state space model I find that the Basel calibration is appropriate for UK and US mortgages. This model also forecasts mortgage default rates accurately and parsimoniously. The model generates value-at-risk estimates for future mortgage default rates, which can be used to inform stress-testing and macroprudential policy.

Keywords: Mortgages; bank regulation; credit risk; default correlation; state space model; Basel Committee; stress testing; macroprudential policy (search for similar items in EconPapers)
JEL-codes: G11 G17 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-for, nep-mac, nep-rmg and nep-ure
Date: 2018-02-09
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... C3789F4B1D2079EEF177 Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0708

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().

 
Page updated 2019-04-19
Handle: RePEc:boe:boeewp:0708