
doi: 10.2139/ssrn.2646112
The Great Recession offers a unique opportunity to analyze the performance of credit risk models under conditions of economic stress. We focus on the performance of models of credit risk applied to risk-segmented credit card portfolios. Specifically, we focus on models of default and loss and analyze three important sources of model risk: model selection, model specification, and sample selection. Forecast errors can be significant along any of these three model-risk dimensions. Simple linear regression models are not generally outperformed by more complex or stylized models. The impact of macroeconomic variables is heterogeneous across risk segments. Model specifications that do not consider this heterogeneity display large projection errors across risk segments. Prime segments are proportionally more severely impacted by a downturn in economic conditions relative to the subprime or near-prime segments. The sensitivity of modeled losses to macroeconomic factors is conditional on the model development sample. Models estimated over a period that does not incorporate a significant period of the Great Recession may fail to project default rates, or loss rates, consistent with those experienced during the Great Recession.
Credit cards; Credit risk; Stress test; Risk segmentation;, jel: jel:G20, jel: jel:G32, jel: jel:G33
Credit cards; Credit risk; Stress test; Risk segmentation;, jel: jel:G20, jel: jel:G32, jel: jel:G33
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