FORECASTING THE RETURN OF THE LOAN PORTFOLIO ON THE BASIS OF MARKOV MODEL

Abstract

We consider the problem of mathematical modelling of ows of loan portfolio payments. We assume that the change in the quality of each loan is described by a simple Markov chain with a nite number of states. In this case, the ow of loan payments is a random process, which depends on the Markov chain. On the basis of the proposed model and known relations of the stochastic systems theory, we describe the expected ows of payments of the entire loan portfolio and construct a method to forecast the expected return (net present value) of the portfolio. We analyze an accuracy of the obtained model and a sensitivity of net present value of the portfolio to a change in the transition probabilities in the Markov chain