Dynamic Valuation of Delinquent Credit-Card Accounts

Naveed Chehrazi () and Thomas Weber
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Naveed Chehrazi: Department of Information, Risk, and Operations Management, McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712

Management Science, 2015, vol. 61, issue 12, 3077-3096

Abstract: This paper introduces a dynamic model of the stochastic repayment behavior exhibited by delinquent credit-card accounts. Based on this model, we construct a dynamic collectability score (DCS) that estimates the account-specific probability of collecting a given portion of the outstanding debt over any given time horizon. The model integrates a variety of information sources, including historical repayment data, account-specific, and time-varying macroeconomic covariates, as well as scheduled account-treatment actions. Two model-identification methods are examined, based on maximum-likelihood estimation and the generalized method of moments. The latter allows for an operational-statistics approach, combining model estimation and performance optimization by tailoring the estimation error to business-relevant loss functions. The DCS framework is applied to a large set of account-level repayment data. The improvements in classification and prediction performance compared to standard bank-internal scoring methods are found to be significant. This paper was accepted by Noah Gans, stochastic models and simulation .

Keywords: account valuation; consumer credit; collectability scoring; credit collections; GMM estimation; maximum-likelihood estimation; operational statistics; self-exciting point process (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:12:p:3077-3096

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