Modeling data with multiple time dimensions

Stress testing credit card portfolios: an application in South Africa

“…month-on-book), the vintage of the card (when they were first opened) and a remaining factor which should be explained by the economic situation. Following Breeden (2007) and the analysis done earlier in this paper on the aggregate model, one realises that this term should include dummy variables describing changes in the lender's policy as well as the economic variables. There is though a difference between the lender's policy changes considered in this approach and that in the regression based aggregate approach.…”

“…A curve y against the months-on-book for different vintages can be plotted (See Figure 9 for illustration). Breeden (2007) proposes that one can model this curve by three factors: maturity, exogenous and vintage quality. We use a similar approach but also include seasonality into the model since it may have impact on the default rate.…”

“…This second type of model was based on the dual time dynamics approach of Breeden (2007). In this model, the changes in delinquency rates over that period were assumed to be the product of the impact of the maturity of the card (i.e.…”

“…This approach uses the general portfolio performance to map the shape of the months-on-book effect (called the Maturation Curve), which is so important in retail credit. Exogenous, time-based variables such as seasonality, management actions and economic environmental factors were later factored into the Maturation Curve to produce a vintage curve (Breeden and Smith, 2002;Breeden, 2007). Although vintage cycles can be applied to many variables (e.g.…”

Consumer finance: challenges for operational research

“…This is so important we identify it as a separate challenge ( Challenge 7) and discuss it further there. Researchers are beginning to address different ways of building models of the credit risk for portfolios of consumer loans which can then be used for stress testing ( Breeden 2007, Breeden et al 2008b, Rosch and Schuele 2008, Malik and Thomas 2009 Similarly the fourth issue that the Basel Accord has highlighted, the need to model the recovery rate RR (or alternatively the loss given default LGD, where RR=1-LGD) of what percentage of a defaulted loan will subsequently be recovered is also so important that it deserves to be considered as a separate challenge ( Challenge 8).…”