Joint models of multivariate longitudinal outcomes and discrete survival data with INLA: An application to credit repayment behaviour

Victor Medina-Olivares, Finn Lindgren, Raffaella Calabrese and Jonathan Crook

European Journal of Operational Research, 2023, vol. 310, issue 2, 860-873

Abstract: Survival models with time-varying covariates (TVCs) are widely used in the literature on credit risk prediction. However, when these covariates are endogenous, the inclusion procedure has been limited to practices such as lagging these variables or treating them as exogenous. That leads to possible biased estimators (depending on the strength of the exogeneity assumption) and a lack of prediction framework that consolidates the joint evolution of the survival process and the endogenous TVCs. The use of joint models is a suitable approach for handling endogeneity, however, it comes at a high computational cost. We propose a joint model for bivariate endogenous TVCs and discrete survival data using integrated nested Laplace approximation (INLA). We illustrate the implementation via simulations and build a model for full-prepayment consumer loans. We also propose a methodology for individual survival prediction using the Laplace method that leads to more accurate approximations than comparable approaches. We evidence the superiority of joint models over the traditional survival approach for an out-of-sample and out-of-time analysis.

Keywords: OR in banking; Bayesian joint models; Discrete time; Laplace approximation; Credit prepayment (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:310:y:2023:i:2:p:860-873

DOI: 10.1016/j.ejor.2023.03.012

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