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An economic model for credit assessment problem using screening approaches

An economic model for credit assessment problem using screening approaches
An economic model for credit assessment problem using screening approaches
How to combine varying credit information collected from various sources at difference periods for the purpose of credit assessment is an important issue for some financial companies. In this article, the screening procedures using individual cut and linear cut approaches are proposed to solve the issue and to control default rates in credit assessment problems. Then, an economic screening model is provided to incorporate with the proposed approaches so that optimal cutoff points are determined by maximizing total profit.
An example of a loan programme is illustrated the use of the proposed economic screening procedures. The results show that the linear cut approach uniformly outperforms the individual cut approach in terms of total profit and computation complexity. Moreover, the linear cut approach can be easily extended to the case with multiple variables and the solution is also in a closed form. Therefore, the screening procedure using the linear cut approach is strongly recommended for credit assessment problems.
credit, scoring, scorecard, screening
0160-5682
836-843
Tsai, H-T.
a3ce3068-328b-4bce-889f-965b0b9d2362
Thomas, L.C.
61325cfd-cf0a-4c36-8cc0-ce9ed4494c4f
Yeh, H-C.
198c29be-e12c-40ba-86c4-69c48b0ce40c
Tsai, H-T.
a3ce3068-328b-4bce-889f-965b0b9d2362
Thomas, L.C.
61325cfd-cf0a-4c36-8cc0-ce9ed4494c4f
Yeh, H-C.
198c29be-e12c-40ba-86c4-69c48b0ce40c

Tsai, H-T., Thomas, L.C. and Yeh, H-C. (2005) An economic model for credit assessment problem using screening approaches. Journal of the Operational Research Society, 56 (7), 836-843. (doi:10.1057/palgrave.jors.2601911).

Record type: Article

Abstract

How to combine varying credit information collected from various sources at difference periods for the purpose of credit assessment is an important issue for some financial companies. In this article, the screening procedures using individual cut and linear cut approaches are proposed to solve the issue and to control default rates in credit assessment problems. Then, an economic screening model is provided to incorporate with the proposed approaches so that optimal cutoff points are determined by maximizing total profit.
An example of a loan programme is illustrated the use of the proposed economic screening procedures. The results show that the linear cut approach uniformly outperforms the individual cut approach in terms of total profit and computation complexity. Moreover, the linear cut approach can be easily extended to the case with multiple variables and the solution is also in a closed form. Therefore, the screening procedure using the linear cut approach is strongly recommended for credit assessment problems.

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More information

Published date: 2005
Keywords: credit, scoring, scorecard, screening

Identifiers

Local EPrints ID: 36176
URI: http://eprints.soton.ac.uk/id/eprint/36176
ISSN: 0160-5682
PURE UUID: 3b6b9c2b-0529-4dbb-b69a-fa492df28e94

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Date deposited: 22 May 2006
Last modified: 15 Jul 2019 19:05

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Contributors

Author: H-T. Tsai
Author: L.C. Thomas
Author: H-C. Yeh

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