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Activity Number:
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610
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Type:
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Contributed
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Date/Time:
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Thursday, August 6, 2009 : 10:30 AM to 12:20 PM
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Sponsor:
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Business and Economic Statistics Section
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| Abstract - #303659 |
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Title:
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Building Default Models for Subprime Mortgages: Assessing the Risk in a Rapidly Changing Environment
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Author(s):
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Vladimir Ladyzhets*+
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Companies:
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Babson Capital Management LLC
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Address:
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500 Main St, Suite 1000, Springfield, MA, 01115,
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Keywords:
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implied default ; decision trees ; variable selection ; G-based default mode
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Abstract:
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The paper presents the major results of the research project of building default models for pools of residential mortgages. The models have been developed to assess the risk of investing into the financial securities backed by those pools in a rapidly changing environment. It has been demonstrated that by modifying the definition of mortgage default---using implied default---one can extract more realistic patterns of borrower behavior under adverse economic scenarios from the same historical data. It has been shown that different types of decision trees can be effectively used to provide the best variable selection and to break the universe of mortgage borrowers into groups that exhibit significant differences with respect to their default propensity. The paper discusses several generations of default models (G-based model, stochastic G-based model) that that were built and tested.
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