An Empirical Study of Bank Stress Testing for Auto Loans
42 Pages Posted: 8 Apr 2015 Last revised: 4 Oct 2018
Date Written: June 1, 2018
We present an empirical study of stress testing for portfolios of auto loans. We find that loans aged five years or more have significantly higher default probabilities. This finding raises concerns about the increasing maturity of auto loans in recent years. A challenge in stress testing is the instability of the estimated coefficient of macroeconomic variables, which raises questions on the reliability of stress test results. For this reason, it is important for model developers to perform sensitivity analyses and make conservative adjustment to minimize model risk.
Keywords: Auto loan defaults, stress testing, model instability, loan age, macroeconomic variables, used car prices
JEL Classification: G21, G28, G18, G32
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