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Credit risk modeling in segmented portfolios: an application to credit cards

Author

Listed:
  • Sougata Kerr
  • Jose J. Canals-Cerda

Abstract

The Great Recession offers a unique opportunity to analyze the performance of credit risk models under conditions of economic stress. We focus on the performance of models of credit risk applied to risk-segmented credit card portfolios. Specifically, we focus on models of default and loss and analyze three important sources of model risk: model selection, model specification, and sample selection. Forecast errors can be significant along any of these three model-risk dimensions. Simple linear regression models are not generally outperformed by more complex or stylized models. The impact of macroeconomic variables is heterogeneous across risk segments. Model specifications that do not consider this heterogeneity display large projection errors across risk segments. Prime segments are proportionally more severely impacted by a downturn in economic conditions relative to the subprime or near-prime segments. The sensitivity of modeled losses to macroeconomic factors is conditional on the model development sample. Models estimated over a period that does not incorporate a significant period of the Great Recession may fail to project default rates, or loss rates, consistent with those experienced during the Great Recession.

Suggested Citation

  • Sougata Kerr & Jose J. Canals-Cerda, 2015. "Credit risk modeling in segmented portfolios: an application to credit cards," Working Papers 15-8, Federal Reserve Bank of Philadelphia, revised 01 Feb 2015.
  • Handle: RePEc:fip:fedpwp:15-8
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    References listed on IDEAS

    as
    1. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
    2. Silvia Ferrari & Francisco Cribari-Neto, 2004. "Beta Regression for Modelling Rates and Proportions," Journal of Applied Statistics, Taylor & Francis Journals, vol. 31(7), pages 799-815.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Credit risk; Stress test; Risk segmentation; Credit cards;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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