%0 Journal Article
%T A 2-Factor Model for Inclusion of Voluntary Termination Risk in Automotive Retail Loan Portfolios
%A Simone Caenazzo
%A Ksenia Ponomareva
%A Mark Pain
%A Rob Wareing
%A Jameel Shivji
%J Journal of Mathematical Finance
%P 339-354
%@ 2162-2442
%D 2023
%I Scientific Research Publishing
%R 10.4236/jmf.2023.133021
%X Under the UK Consumer Act 1974, obligors of Hire Purchase and Conditional Sale contracts are allowed to perform a Voluntary Termination (VT) once certain conditions are met. Upon such an event, lenders recover the underlying assets but are potentially liable to losses upon liquidation of the assets. This poses a challenge from a risk modelling perspective, as these financial products exhibit Credit (default) risk as well as VT risk, and these two events are mutually exclusive. In this paper, we propose a modelling framework to account for Credit/Default and VT risk for Retail portfolios, designed as a 2-factor Monte Carlo simulation of loan-level termination events. The paper concludes with numerical and backtesting results from a real-life implementation of such framework in the context of an automotive loan portfolio.
%K Counterparty Credit Risk
%K Voluntary Termination
%U http://www.scirp.org/journal/PaperInformation.aspx?PaperID=127188