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Dynamic Stress Test Diffusion Model Considering the Credit Score Performance

Author

Listed:
  • Genest, benoit
  • Fares, Ziad
  • Gombert, Arnault

Abstract

After the crisis of 2008, and the important losses and shortfall in capital that it revealed, regulators conducted massive stress testing exercises in order to test the resilience of financial institutions in times of stress conditions. In this context, and considering the impact of these exercises on the banks’ capital, organization and image, this white paper proposes a methodology that diffuses dynamically the stress on the credit rating scale while considering the performance of the credit score. Consequently, the aim is to more accurately reflect the impact of the stress on the portfolio by taking into account the purity of the score and its ability to precisely rank the individuals of the portfolio.

Suggested Citation

  • Genest, benoit & Fares, Ziad & Gombert, Arnault, 2014. "Dynamic Stress Test Diffusion Model Considering the Credit Score Performance," MPRA Paper 62905, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62905
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    File URL: https://mpra.ub.uni-muenchen.de/62905/1/MPRA_paper_62905.pdf
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    More about this item

    Keywords

    Basel III; Dodd Frank; Stress testing; CCAR; Gini; Rating scale; PD;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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