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Enhanced Decision Support in Credit Scoring Using Bayesian Binary Quantile Regression

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  • V. L. MIGUÉIS
  • D. F. BENOIT

    ()

  • D. VAN DEN POEL

    ()

Abstract

Fierce competition as well as the recent financial crisis in financial and banking industries made credit scoring gain importance. An accurate estimation of credit risk helps organizations to decide whether or not to grant credit to potential customers. Many classification methods have been suggested to handle this problem in the literature. This paper proposes a model for evaluating credit risk based on binary quantile regression, using Bayesian estimation. This paper points out the distinct advantages of the latter approach: that is (i) the method provides accurate predictions of which customers may default in the future, (ii) the approach provides detailed insight into the effects of the explanatory variables on the probability of default, and (iii) the methodology is ideally suited to build a segmentation scheme of the customers in terms of risk of default and the corresponding uncertainty about the prediction. An often studied dataset from a German bank is used to show the applicability of the method proposed. The results demonstrate that the methodology can be an important tool for credit companies that want to take the credit risk of their customer fully into account.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 12/803.

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Length: 17 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:rug:rugwps:12/803

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Keywords: Credit Scoring; Quantile regression; Classification; Bayesian estimation; Markov Chain Monte Carlo;

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  1. Omar Arias & Kevin F. Hallock & Walter Sosa Escudero, 1999. "Individual Heterogeneity in the Returns to Schooling: Instrumental Variables Quantile Regression using Twins Data," Department of Economics, Working Papers 016, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  2. Len Umantsev & Victor Chernozhukov, 2001. "Conditional value-at-risk: Aspects of modeling and estimation," Empirical Economics, Springer, vol. 26(1), pages 271-292.
  3. Engle, Robert F & Manganelli, Simone, 1999. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," University of California at San Diego, Economics Working Paper Series qt06m3d6nv, Department of Economics, UC San Diego.
  4. Manski, Charles F., 1975. "Maximum score estimation of the stochastic utility model of choice," Journal of Econometrics, Elsevier, vol. 3(3), pages 205-228, August.
  5. Gilbert W. Bassett Jr. & Hsiu-Lang Chen, 2001. "Portfolio style: Return-based attribution using quantile regression," Empirical Economics, Springer, vol. 26(1), pages 293-305.
  6. Li, Ming-Yuan Leon & Miu, Peter, 2010. "A hybrid bankruptcy prediction model with dynamic loadings on accounting-ratio-based and market-based information: A binary quantile regression approach," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 818-833, September.
  7. Martin, Daniel, 1977. "Early warning of bank failure : A logit regression approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 249-276, November.
  8. Gregory Kordas, 2006. "Smoothed binary regression quantiles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(3), pages 387-407.
  9. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
  10. Moshe Buchinsky, 1998. "The dynamics of changes in the female wage distribution in the USA: a quantile regression approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 1-30.
  11. Kahn, Lawrence M, 1998. "Collective Bargaining and the Interindustry Wage Structure: International Evidence," Economica, London School of Economics and Political Science, vol. 65(260), pages 507-34, November.
  12. Buchinsky, Moshe, 1994. "Changes in the U.S. Wage Structure 1963-1987: Application of Quantile Regression," Econometrica, Econometric Society, vol. 62(2), pages 405-58, March.
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