HONG KONG, 07 July 2020. Pengyuan International has released one research report, “An Introduction on the Methods of Extrapolating the Static Pool Data”.
When analyzing the credit risk of securitization transactions with a homogeneous and well-diversified portfolio, such as consumer loan ABS and auto loan ABS, static pool analysis approach is typically applied to estimate the portfolio’s default risk (measured by cumulative default rate) using the static pool data provided by the originator. A static pool is a group of assets generated during a specific calendar period, typically a month, quarter or year (referred to as the “vintage” of the data). In general, not all of the static pools provided by the originator have gone through the entire life cycle. For incomplete static pools, the estimates of the cumulative default rates are performed using extrapolation techniques. Specifically, we first calculate the cumulative default rate of each vintage at each observation period, and then project forward the default rates of incomplete vintages through the extrapolation method.
There are five commonly used extrapolation methods: growth rate extrapolation method, growth increment extrapolation method, hybrid extrapolation method, pay-out ratio extrapolation method and default timing distribution extrapolation method. In the course of this research, we discuss the five methods and illustrate the computation procedure in detail. We also use hypothetical and real static pool data to assess and compare the differences in computation and results of these methods. The following highlights some of the key findings:
The pay-out ratio extrapolation method only uses a vintage’s own pay-out data but ignores the historical default performance of other vintages. In addition, the method cannot derive the growth trend of the cumulative default rate as the observation period increases.
The default timing distribution extrapolation method has two limitations. The method cannot guarantee the monotonicity (non-decreasing) of cumulative default rates; and its computation requires a certain number of vintages that have been 100% paid out.
The growth rate extrapolation method and hybrid extrapolation method produce relatively conservative results (high default rates) when recent vintages show deteriorating performance. Their extrapolated results demonstrate relatively higher volatility and are more likely to generate outliers.
The growth increment extrapolation method produces relatively conservative results when recent vintages show improving performance. The extrapolated default rates by applying this method show less fluctuation and rarely produce outliers. We believe the growth increment extrapolation method is a suitable approach to extrapolate the default rates of incomplete static pools.
Ke Chen, PhD
+852 3615 8316
Shiyu Wang, PhD
+86 755 8287 1237
+852 3615 8278
+852 3615 8296
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Date of Relevant Rating Committee: 03 July 2020
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