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Modelling credit risk in portfolios of consumer loans: transition matrix model for consumer credit ratings

Modelling credit risk in portfolios of consumer loans: transition matrix model for consumer credit ratings
Modelling credit risk in portfolios of consumer loans: transition matrix model for consumer credit ratings
The corporate credit risk literature has many studies modelling the change in the credit risk of corporate bonds over time. There is far less analysis of the credit risk for portfolios of consumer loans. However behavioural scores, which are commonly calculated on a monthly basis by most consumer lenders are the analogues of ratings in corporate credit risk. Motivated by studies in corporate credit risk, we develop a Markov chain model based on behavioural scores to establish the credit risk of portfolios of consumer loans. We motivate the different aspects of the model – the need for a second order Markov chain, the inclusion of economic variables and the age of the loan – using data on a credit card portfolio from a major UK bank.
markov chain, credit risk, logistic regression, credit scoring
CRR-09-02
University of Southampton
Malik, Madhur
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Thomas, Lyn
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Malik, Madhur
fcf77f80-dc6b-42aa-9287-949b27f49a3f
Thomas, Lyn
a3ce3068-328b-4bce-889f-965b0b9d2362

Malik, Madhur and Thomas, Lyn (2009) Modelling credit risk in portfolios of consumer loans: transition matrix model for consumer credit ratings (Discussion Papers in Centre for Risk Research, CRR-09-02) Southampton, UK. University of Southampton 21pp.

Record type: Monograph (Working Paper)

Abstract

The corporate credit risk literature has many studies modelling the change in the credit risk of corporate bonds over time. There is far less analysis of the credit risk for portfolios of consumer loans. However behavioural scores, which are commonly calculated on a monthly basis by most consumer lenders are the analogues of ratings in corporate credit risk. Motivated by studies in corporate credit risk, we develop a Markov chain model based on behavioural scores to establish the credit risk of portfolios of consumer loans. We motivate the different aspects of the model – the need for a second order Markov chain, the inclusion of economic variables and the age of the loan – using data on a credit card portfolio from a major UK bank.

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More information

Published date: 2009
Keywords: markov chain, credit risk, logistic regression, credit scoring

Identifiers

Local EPrints ID: 71381
URI: http://eprints.soton.ac.uk/id/eprint/71381
PURE UUID: 7ca2ad8e-8798-42a9-8281-54423d715f79

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Date deposited: 03 Feb 2010
Last modified: 13 Mar 2024 20:26

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Contributors

Author: Madhur Malik
Author: Lyn Thomas

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