Modeling and model validation of the impact of the economy on the credit risk of credit card portfolios


So, M.C. and Thomas, L.C. (2010) Modeling and model validation of the impact of the economy on the credit risk of credit card portfolios. Journal of Risk Model Validation, 4, (4), 93-126.

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Description/Abstract

Since the global credit crunch, lenders have recognized how critical it is to assess the default risk of portfolios of consumer borrowing under different economic environments. We describe a Markov chain model for revolving consumer credit accounts based on consumers' behavioral scores that includes the impact of the economy on the risk migration of credit card accounts. We use two credit card data sets, one from Hong Kong and one from the UK, to validate the model, and hence provide empirical evidence to encourage lenders to use macroeconomic measurements to estimate the default risk in credit card portfolios. The models show how economic variables such as unemployment and price indexes have an impact, both directly, by changing the dynamics of the credit scores, and indirectly, by affecting how many credit card accounts become inactive or reactive themselves. The model also shows the difference in impact that economic changes have on transactors and revolvers.

Item Type: Article
ISSNs: 1753-9579 (print)
1753-9587 (electronic)
Related URLs:
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 180715
Date Deposited: 13 Apr 2011 08:34
Last Modified: 27 Mar 2014 19:34
URI: http://eprints.soton.ac.uk/id/eprint/180715

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