Journal of Risk Model Validation

Stress testing of retail mortgages: a study based on non-stationary Markov chains and t-copula simulation

Chang Liu, Min Guo and Raja Nassar


In this study, real-life retail mortgage loan data from a Chinese national commercial bank is used to generate the projected distribution over a set of predefined mortgage states or categories. Non-stationary Markov chain transition probabilities between these states are calculated using loan data from 57 consecutive months. In order to validate the model and assess the risk, we used the data gathered to simulate, by a t-copula method, the projected portfolio distribution over the states of a retail mortgage loan in different shock scenarios. The approach proposed in this paper can be readily extended to other retail credit products as well.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: