Introducing time-changing economics into credit scoring

Maria Rocha Sousa (), João Gama () and Elísio Brandão ()
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Maria Rocha Sousa: School of Economics and Management, University of Porto
João Gama: LIAAD-INESC TEC; School of Economics and Management, University of Porto
Elísio Brandão: School of Economics and Management, University of Porto

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: We propose a two-stage model for dealing with the temporal degradation of credit scoring models. First, we develop a model from a classical framework, with a static supervised learning setting and binary output. Then, we introduce the time-changing economic factors, using a regression between the macroeconomic data and the internal default in the portfolio. In so doing, the specific risk is captured from the bank internal database, and the movement of systemic risk is determined with the regression. This methodology produced motivating results in a 1-year horizon, for a portfolio of customers with credit cards in a financial institution operating in Brazil. We anticipate that it can be extended to other applications of risk assessment with great success. This methodology can be further improved if more information about the economic cycles is integrated in the forecasting of default.

Keywords: risk assessment; credit scoring; temporal degradation; score adjustment; time-changing economics (search for similar items in EconPapers)
JEL-codes: C5 C8 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2013-11
New Economics Papers: this item is included in nep-for and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:513

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