Forecasting losses on a liquidating long-term loan portfolio

Assessing the condition of financial institutions and valuation of loan portfolios in secondary markets require the estimation of exposure to losses on existing portfolios of long-term loans. Data from a major U.S. financial institution were used to construct a forecasting model with Markovian structure and nonstationary transition probabilities. The model proved to be effective in representing changes in probability of default that occur as individual loans mature and accurate in forecasting aggregate defaults and losses on a nationwide portfolio of long-term loans.