Dynamic Valuation of Delinquent Credit-Card Accounts

Forthcoming in Management Science

28th Australasian Finance and Banking Conference

34 Pages Posted: 21 Jun 2011 Last revised: 28 Jul 2016

See all articles by Naveed Chehrazi

Naveed Chehrazi

University of Texas at Austin - Red McCombs School of Business

Thomas A. Weber

Ecole Polytechnique Federale de Lausanne - MTEI

Date Written: February 25, 2015

Abstract

This paper introduces a dynamic model of the stochastic repayment behavior exhibited by delinquent credit-card accounts. Based on this model, we construct a dynamic collectability score (DCS) which estimates the account-specific probability of collecting a given portion of the outstanding debt over any given time horizon. The model integrates a variety of information sources, including historical repayment data, account-specific, and time-varying macroeconomic covariates, as well as scheduled account-treatment actions. Two model-identification methods are examined, based on maximum-likelihood estimation and the generalized method of moments. The latter allows for an operational-statistics approach, combining model estimation and performance optimization by tailoring the estimation error to business-relevant loss functions. The DCS framework is applied to a large set of account-level repayment data. The improvements in classification and prediction performance compared to standard bank-internal scoring methods are found to be significant.

Keywords: Account valuation; consumer credit; collectability scoring; credit collections; GMM estimation; maximum-likelihood estimation; operational statistics; self-exciting point process

JEL Classification: C51, C53, C81, D14, G21

Suggested Citation

Chehrazi, Naveed and Weber, Thomas A., Dynamic Valuation of Delinquent Credit-Card Accounts (February 25, 2015). Forthcoming in Management Science; 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=1868581 or http://dx.doi.org/10.2139/ssrn.1868581

Naveed Chehrazi

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Thomas A. Weber (Contact Author)

Ecole Polytechnique Federale de Lausanne - MTEI ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland
+41 (0)21 693 01 41 (Phone)
+41 (0)21 693 00 20 (Fax)

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