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

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

93-126
So, M.C.
c6922ccf-547b-485e-8b74-a9271e6225a2
Thomas, L.C.
a3ce3068-328b-4bce-889f-965b0b9d2362
So, M.C.
c6922ccf-547b-485e-8b74-a9271e6225a2
Thomas, L.C.
a3ce3068-328b-4bce-889f-965b0b9d2362

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.

Record type: Article

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.

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More information

Published date: 1 December 2010

Identifiers

Local EPrints ID: 180715
URI: http://eprints.soton.ac.uk/id/eprint/180715
PURE UUID: 29bc6b27-3fc8-495f-8f9f-748c11e652e3
ORCID for M.C. So: ORCID iD orcid.org/0000-0002-8507-4222

Catalogue record

Date deposited: 13 Apr 2011 08:34
Last modified: 23 Jul 2022 01:57

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Contributors

Author: M.C. So ORCID iD
Author: L.C. Thomas

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