Creditworthiness dynamics and Hidden Markov Models

L Quirini and L Vannucci
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L Quirini: Consum.it—Monte dei Paschi di Siena Group, Calenzano, Italy
L Vannucci: University of Florence, Florence, Italy

Journal of the Operational Research Society, 2014, vol. 65, issue 3, 323-330

Abstract: A dynamic monitoring of credit risky portfolios is described. In the first section, it is shown how a Markov dependence can be used in modelling the borrower's behaviour: a chain of transition probabilities matrices is built in which the states of the dynamic stochastic system are the number of instalments in arrears. In the second part, such a model is generalized in the framework of the Hidden Markov Models to explain how the credit market conditions could affect the borrower's payment process. Numerical examples complete the note.

Date: 2014
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