Forecasting and Stress-Testing U.S. Vehicles ABS Deals

Abstract

In this study, an econometric model has been developed to forecast and stress test the collateral backing global asset-backed security/residential mortgage-backed security (ABS/RMBS) deals. The authors outline a modeling approach they use to forecast and stress test the cash flow backing U.S. vehicle ABS deals. Their econometric approach considers loan characteristics, economic conditions at loan origination, past pool performance, and dynamics in the macroeconomic environment over time to explain changes in pool-level performance. The main outputs of these models are scenario-based default, prepayment, and severity vectors based on macroeconomic assumptions. These vectors provide all necessary data to run waterfall valuation engines and thus compute fair value and expected loss under baseline as well as stressed economic conditions.

TOPICS: Asset-backed securities (ABS), legal/regulatory/public policy, risk management