Modeling Credit Risk of Portfolio of Consumer Loans

20 Pages Posted: 22 Oct 2008

See all articles by Madhur Malik

Madhur Malik

University of Southampton

Lyn C. Thomas

University of Southampton - School of Management

Date Written: April 17, 2007

Abstract

One of the issues that the Basel Accord highlighted was that though techniques for estimating the probability of default and hence the credit risk of loans to individual consumers are well established, there were no models for the credit risk of portfolios of such loans. Motivated by the reduced form models for credit risk in corporate lending, we will seek to exploit the obvious parallels between behavioural scores and the ratings ascribed to corporate bonds to build consumer lending equivalents. We incorporate both consumer specific ratings and macroeconomic factors in the framework of Cox Proportional Hazard models. Our results show that default intensities of consumers are significantly influenced by macro factors. Such models then can be used as the basis for simulation approaches to estimate the credit risk of portfolios of consumer loans.

Keywords: Finance, Credit Risk, Survival Analysis, Credit Scoring

JEL Classification: C25, G21, G33

Suggested Citation

Malik, Madhur and Thomas, Lyn C., Modeling Credit Risk of Portfolio of Consumer Loans (April 17, 2007). Available at SSRN: https://ssrn.com/abstract=1287845 or http://dx.doi.org/10.2139/ssrn.1287845

Madhur Malik (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Lyn C. Thomas

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom
(023) 8059 7718 (Phone)
(023) 8059 3844 (Fax)

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