The University of Southampton
University of Southampton Institutional Repository

Transition matrix models of consumer credit ratings

Malik, Madhur and Thomas, Lyn C. (2012) Transition matrix models of consumer credit ratings [in special issue: Special Section 1: The Predictability of Financial Markets. Special Section 2: Credit Risk Modelling and Forecasting] International Journal of Forecasting, 28, (1), pp. 261-272. (doi:10.1016/j.ijforecast.2011.01.007).

Record type: Article


Although 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. Although such models have been used by lenders to develop models for the Basel Accord, there is no published literature on them. The model we suggest differs in many respects from the corporate credit ones based on Markov chains – such as the need for a second order Markov chain, the inclusion of economic variables and the age of the loan. The model is applied using data on a credit card portfolio from a major UK bank.

PDF 0111Transition_Matrixrevision.pdf - Accepted Manuscript
Download (219kB)

More information

Accepted/In Press date: 12 June 2011
Published date: January 2012
Keywords: markov chain, credit risk, logistic regression, credit scoring
Organisations: Management


Local EPrints ID: 185275
ISSN: 0169-2070
PURE UUID: 2be962b4-936f-4169-abce-eb35f058174c

Catalogue record

Date deposited: 18 Jan 2012 11:21
Last modified: 18 Jul 2017 11:49

Export record



Author: Madhur Malik
Author: Lyn C. Thomas

University divisions

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton:

ePrints Soton supports OAI 2.0 with a base URL of

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.