A Consumer Credit Risk Structural Model Based on Affordability: Balance at Risk
18 Pages Posted: 26 Mar 2016 Last revised: 5 Apr 2016
Date Written: March 24, 2016
This paper introduces an approach designed for personal credit risk. We define a structural model related to the financial balance of an individual, allowing for cashflow seasonality and deterministic trends in the process. This formulation is best suited for short-term loans. Using this model, we develop risk measures associated with the probability of default conditional on time. We illustrate empirical applications by estimating an empirical model using simulated data and, on the basis of this model, find yield rate and maturity values that maximize the expected profit from a short-term debt contract.
Keywords: balance at risk, credit risk, personal finance
JEL Classification: D1, G21, G21
Suggested Citation: Suggested Citation