A Consumer Credit Risk Structural Model Based on Affordability: Balance at Risk

20 Pages Posted: 18 Jun 2019

See all articles by Marcelo Perlin

Marcelo Perlin

Escola de Administração - UFRGS

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS)

Tiago Filomena

Universidade Federal do Rio Grande do Sul (UFRGS)

Multiple version iconThere are 2 versions of this paper

Date Written: June 17, 2019

Abstract

This paper introduces an approach designed for personal credit risk, with possible applications in risk assessment and optimization of debt contracts. We define a structural model related to the financial balance of an individual, allowing for cashflow seasonality and deterministic trends in the process. Based on the proposed model, we develop risk measures associated with the probability of default rates conditional on time. This formulation is best suited to short-term loans, where the dynamics of individuals’ cashflow, such as seasonality and uncertainty, can significantly impact future default rates. In the empirical section of this paper, we illustrate an application by estimating risk measures using simulated data. We also present the specific case of optimization of a financial contract, where, based on an estimated model, we find the yield rate/time to maturity pair that maximizes the expected profit or minimizes the default risk of a short-term debt contract.

Keywords: credit risk, balance at risk (BaR), personal finance, cashflow

Suggested Citation

Perlin, Marcelo and Righi, Marcelo and Filomena, Tiago, A Consumer Credit Risk Structural Model Based on Affordability: Balance at Risk (June 17, 2019). Journal of Credit Risk, Vol. 15, No. 2, 2019. Available at SSRN: https://ssrn.com/abstract=3405454

Marcelo Perlin (Contact Author)

Escola de Administração - UFRGS ( email )

Porto-Alegre RS
Brazil

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

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Washington Luis, 855
Porto Alegre, Rio Grande do Sul 90010-460
Brazil

Tiago Filomena

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Av. Carlos Gomes 1111
Porto Alegre, Rio Grande do Sul 90480-004
Brazil

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
55
PlumX Metrics