An application to the Capital and Loss Assessment under Stress Scenarios (CLASS) Model
In this paper authors test the approach on the credit loss component of the "Capital and Loss Assessment under Stress Scenarios" model (CLASS) as an empirical example to demonstrate how it can influence the validation outcomes.
The results show that this model does not capture changes in the underlying parameters of risk behavior under severly adverse economic conditions, such as those observed during the great financial crisis, therefore giving a false sense of security. The use of non-linear models, however, can circumvent this pitfall.
Published on: January 2017
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