Development and Validation of Credit Scoring Models

70 Pages Posted: 30 Jul 2008

See all articles by Dennis Glennon

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Nicholas M. Kiefer

Cornell University - Department of Economics

C. Erik Larson

Promontory Financial Group

Hwan-sik Choi

Purdue University - Department of Consumer Sciences & Retailing

Date Written: July 9, 2008

Abstract

Accurate credit-granting decisions are crucial to the efficiency of the decentralized capital allocation mechanisms in modern market economies. Credit bureaus and many financial institutions have developed and used credit-scoring models to standardize and automate, to the extent possible, credit decisions. We build credit scoring models for bankcard markets using the Office of the Comptroller of the Currency, Risk Analysis Division (OCC/RAD) consumer credit database (CCDB). This unusually rich data set allows us to evaluate a number of methods in common practice. We introduce, estimate, and validate our models, using both out-of-sample contemporaneous and future validation data sets. Model performance is compared using both separation and accuracy measures. A vendor-developed generic bureau-based score is also included in the model performance comparisons. Our results indicate that current industry practices, when carefully applied, can produce models that robustly rank-order potential borrowers both at the time of development and through the near future. However, these same methodologies are likely to fail when the the objective is to accurately estimate future rates of delinquency or probabilities of default for individual or groups of borrowers.

Keywords: Logistic regression, CHAID, specication testing, risk management, nonparametrics, validation

JEL Classification: C13, C14, C52, G11, G32

Suggested Citation

Glennon, Dennis and Kiefer, Nicholas M. and Larson, C. Erik and Choi, Hwan-sik, Development and Validation of Credit Scoring Models (July 9, 2008). Journal of Credit Risk, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1180302

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

250 E Street, SW
Senior Financial Economist; Economics Department
Washington, DC 20219-0001
United States
202-874-4725 (Phone)
202-874-5394 (Fax)

Nicholas M. Kiefer

Cornell University - Department of Economics ( email )

490 Uris Hall
Ithaca, NY 14853-7601
United States

C. Erik Larson (Contact Author)

Promontory Financial Group ( email )

1201 Pennsylvania Avenue, NW
Suite 617
Washington, DC 20004
United States
202-384-1200 (Phone)

HOME PAGE: http://www.ceriklarson.com

Hwan-sik Choi

Purdue University - Department of Consumer Sciences & Retailing ( email )

812 W. State St
West Lafayette, IN 47907
United States

HOME PAGE: http://sites.google.com/site/choihwansik/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2,267
Abstract Views
8,594
rank
6,593
PlumX Metrics