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Introducing time-changing economics into credit scoring

Author

Listed:
  • Maria Rocha Sousa

    (School of Economics and Management, University of Porto)

  • João Gama

    (LIAAD-INESC TEC; School of Economics and Management, University of Porto)

  • Elísio Brandão

    (School of Economics and Management, University of Porto)

Abstract

We propose a two-stage model for dealing with the temporal degradation of credit scoring models. First, we develop a model from a classical framework, with a static supervised learning setting and binary output. Then, we introduce the time-changing economic factors, using a regression between the macroeconomic data and the internal default in the portfolio. In so doing, the specific risk is captured from the bank internal database, and the movement of systemic risk is determined with the regression. This methodology produced motivating results in a 1-year horizon, for a portfolio of customers with credit cards in a financial institution operating in Brazil. We anticipate that it can be extended to other applications of risk assessment with great success. This methodology can be further improved if more information about the economic cycles is integrated in the forecasting of default.

Suggested Citation

  • Maria Rocha Sousa & João Gama & Elísio Brandão, 2013. "Introducing time-changing economics into credit scoring," FEP Working Papers 513, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:513
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    References listed on IDEAS

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    Cited by:

    1. Yanhao Wei & Pinar Yildirim & Christophe Van den Bulte & Chrysanthos Dellarocas, 2016. "Credit Scoring with Social Network Data," Marketing Science, INFORMS, vol. 35(2), pages 234-258, March.
    2. Tomáš Vaněk & David Hampel, 2017. "The Probability of Default Under IFRS 9: Multi-period Estimation and Macroeconomic Forecast," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(2), pages 759-776.

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    More about this item

    Keywords

    risk assessment; credit scoring; temporal degradation; score adjustment; time-changing economics;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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