The methods for studying credit portfolio behavior the author presents in the Modeling and Stress-Testing Credit Portfolio Behavior are partly based on so-called “dual-time-dynamics” method. This concept was introduced by Joe Breeden in 2007. V. G. Babikov in his work suggests using this method not for decomposing scalar values but for decomposing matrices. The author considers a credit portfolio as a process described by a first-order heterogeneous Markov chain. Starting from this premise, the author uses vintage analysis and the theorem of strong convergence of modified fixed-point algorithms to arrive at transition matrix decomposition. This method makes highly accurate forecasts of credit portfolios possible. Reserves can be estimated with excellent precision and relevant values for stress-testing obtained.

The method of universal stress-testing for credit portfolios is one of the main achievements of the article. Taken together, the matrix theory, dual time dynamics and vintage portfolio segmentation can much improve behavior and charge-off forecasts and quality of stress-testing. Also the author’s method can be used to observe several relevant factors at once, e.g. prepayment, portfolio quality, external influences such as the macroeconomic.

In his later article The Theory and practice of Retail Credit the author considers some successful practical applications of his methods described in the article “Credit portfolios behavior modelling and stress-test”.