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Structural Models In Consumer Credit

  • Fabio de Andrade

    (SERASA / EAESP-FGV)

  • Lyn Thomas

    (University of Southhampton)

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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File URL: http://econwpa.repec.org/eps/ri/papers/0407/0407001.pdf
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Paper provided by EconWPA in its series Risk and Insurance with number 0407001.

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Length: 29 pages
Date of creation: 21 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpri:0407001
Note: Type of Document - pdf; pages: 29
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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.
  2. 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 351-67, May.
  3. 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.).
  4. 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.
  5. 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.
  6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  7. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
  8. Roberto Perli & William I. Nayda, 2003. "Economic and regulatory capital allocation for revolving retail exposures," Finance and Economics Discussion Series 2003-39, Board of Governors of the Federal Reserve System (U.S.).
  9. Kartik Athreya, 2004. "Shame as it ever was : stigma and personal bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-19.
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