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Reject inference in application scorecards: evidence from France

Ha Thu Nguyen

No 2016-10, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Credit scoring models are commonly developed using only accepted Known Good/Bad (G/B) applications, called KGB model, because we only know the performance of those accepted in the past. Obviously, the KGB model is not indicative of the entire through-the-door population, and reject inference precisely attempts to address the bias by assigning an inferred G/B status to rejected applications. In this paper, we discuss the pros and cons of various reject inference techniques, and pitfalls to avoid when using them. We consider a real dataset of a major French consumer finance bank to assess the effectiveness of the practice of using reject inference. To do that, we rely on the logistic regression framework to model probabilities to become good/bad, and then validate the model performance with and without sample selection bias correction. Our main results can be summarized as follows. First, we show that the best reject inference technique is not necessarily the most complicated one: reweighting and parceling provide more accurate and relevant results than fuzzy augmentation and Heckmans two-stage correction. Second, disregarding rejected applications significantly impacts the forecast accuracy of the scorecard. Third, as the sum of standard errors dramatically reduces when the sample size increases, reject inference turns out to produce an improved representation of the population. Finally, reject inference appears to be an effective way to reduce overfitting in model selection.

Keywords: Reject inference; sample selection; selection bias; logistic regression; reweighting; parceling; fuzzy augmentation; Heckmans two-stage correction. (search for similar items in EconPapers)
JEL-codes: C51 C52 C53 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-pay
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
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