Forecasting and Stress Testing Credit Card Default Using Dynamic Models

Tony Bellotti and Jonathan Crook
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Tony Bellotti: Credit Research Centre, University of Edinburgh
Jonathan Crook: Credit Research Centre, University of Edinburgh

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: Typically models of credit card default are built on static data, often collected at time of application. We consider alternative models that also include behavioural data about credit card holders and macroeconomic conditions across the credit card lifetime, using a discrete survival analysis framework. We find that dynamic models that include these behavioural and macroeconomic variables give statistically significant improvements in model fit which translates into better forecasts of default at both account and portfolio level when applied to an out-of-sample data set. Additionally, by simulating extreme economic conditions, we show how these models can be used to stress test credit card portfolios.

JEL-codes: D14 G21 (search for similar items in EconPapers)
Date: 2011
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