Transition Matrix Models of Consumer Credit Ratings

27 Pages Posted: 27 Jan 2010

See all articles by Madhur Malik

Madhur Malik

University of Southampton

Lyn C. Thomas

University of Southampton - School of Management

Date Written: January 27, 2010

Abstract

The corporate credit risk literature has many studies modelling the change in the credit risk of corporate bonds over time. There is far less analysis of the credit risk for portfolios of consumer loans. However behavioural scores, which are commonly calculated on a monthly basis by most consumer lenders are the analogues of ratings in corporate credit risk. Motivated by studies in corporate credit risk, we develop a Markov chain model based on behavioural scores to establish the credit risk of portfolios of consumer loans. However such a consumer credit model differs in many respects from corporate credit ones based on Markov chains – the need for a second order Markov chain, the inclusion of economic variables and the age of the loan. The model is applied using data on a credit card portfolio from a major UK bank.

Keywords: Markov chain, Credit risk, Logistic regression, Credit scoring

JEL Classification: C25, G21, G33

Suggested Citation

Malik, Madhur and Thomas, Lyn C., Transition Matrix Models of Consumer Credit Ratings (January 27, 2010). Available at SSRN: https://ssrn.com/abstract=1543465 or http://dx.doi.org/10.2139/ssrn.1543465

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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