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Structural models in consumer credit

Author

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  • de Andrade, Fabio Wendling Muniz
  • Thomas, Lyn

Abstract

We propose a structural credit risk model for consumer lending using option theory and the concept of the value of the consumer’s reputation. Using Brazilian empirical data and a credit bureau score as proxy for creditworthiness we compare a number of alternative models before suggesting one that leads to a simple analytical solution for the probability of default. We apply the proposed model to portfolios of consumer loans introducing a factor to account for the mean influence of systemic economic factors on individuals. This results in a hybrid structural-reduced-form model. And comparisons are made with the Basel II approach. Our conclusions partially support that approach for modelling the credit risk of portfolios of retail credit.
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Suggested Citation

  • de Andrade, Fabio Wendling Muniz & Thomas, Lyn, 2007. "Structural models in consumer credit," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1569-1581, December.
  • Handle: RePEc:eee:ejores:v:183:y:2007:i:3:p:1569-1581
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    References listed on IDEAS

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    1. Avery, Robert B. & Calem, Paul S. & Canner, Glenn B., 2004. "Consumer credit scoring: Do situational circumstances matter?," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 835-856, April.
    2. Kartik B. Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
    3. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
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    5. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    6. Chunsheng Zhou, 1997. "A jump-diffusion approach to modeling credit risk and valuing defaultable securities," Finance and Economics Discussion Series 1997-15, Board of Governors of the Federal Reserve System (U.S.).
    7. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    8. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453 World Scientific Publishing Co. Pte. Ltd..
    9. Perli, Roberto & Nayda, William I., 2004. "Economic and regulatory capital allocation for revolving retail exposures," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 789-809, April.
    10. Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2004. "Consumer credit scoring: do situational circumstances matter?," BIS Working Papers 146, Bank for International Settlements.
    11. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
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    Citations

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    Cited by:

    1. Malik, Madhur & Thomas, Lyn C., 2012. "Transition matrix models of consumer credit ratings," International Journal of Forecasting, Elsevier, vol. 28(1), pages 261-272.
    2. repec:pal:jorsoc:v:61:y:2010:i:3:d:10.1057_jors.2009.109 is not listed on IDEAS
    3. Luis H. R. Alvarez & Jani Sainio, 2010. "A Loan Portfolio Model Subject to Random Liabilities and Systemic Jump Risk," Papers 1006.0863, arXiv.org.
    4. Thomas, Lyn C., 2009. "Modelling the credit risk for portfolios of consumer loans: Analogies with corporate loan models," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(8), pages 2525-2534.
    5. Jonathan Crook & Tony Bellotti, 2010. "Time varying and dynamic models for default risk in consumer loans," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(2), pages 283-305.
    6. repec:pal:jorsoc:v:61:y:2010:i:1:d:10.1057_jors.2009.104 is not listed on IDEAS
    7. Huh, Jaeyung & Chang, Woojin & Lee, Junghoon & Lee, Jaeyong, 2010. "Samsung card lending model," European Journal of Operational Research, Elsevier, vol. 207(1), pages 492-498, November.

    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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