Dynamic Valuation of Delinquent Credit-Card Accounts

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 a...

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Bibliographic Details
Published in:Management science 2015-12, Vol.61 (12), p.3077-3096
Main Authors: Chehrazi, Naveed, Weber, Thomas A.
Format: Article
Language:English
Subjects:
account valuation
Accounts
Classification
collectability scoring
Collection (Accounting)
Consumer behavior
consumer credit
Credit
Credit cards
credit collections
GMM estimation
Information sources
Maximum likelihood method
maximum-likelihood estimation
operational statistics
Optimization
Repayments
self-exciting point process
Stochastic models
Valuation
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Summary: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 .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2015.2203