Journal of Risk Model Validation

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The relationship between default and economic cycle across countries for retail portfolios

Joseph L. Breeden, Lyn Thomas

ABSTRACT

In this paper, we collect consumer delinquency data from several economic shocks in order to study the creation of stress-testing models. We leverage the dual-time dynamics modeling technique to better isolate macroeconomic impacts whenever vintage-level performance data is available. The stress-testing models follow a framework described here of focusing on consumer-centric macroeconomic variables so that the models are as robust as possible when predicting the impacts of future shocks. We consider the Mexican peso crisis/Tequila effect by examining Argentina, the Asian economic crisis by considering Thailand, Indonesia and Singapore, the Hong Kong Severe Acute Respiratory Syndrome (SARS) recession and the relative lack of recessions in recent data from Canada and Australia.

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