Dynamic Valuation of Delinquent Credit-Card Accounts
Forthcoming in Management Science
34 Pages Posted: 21 Jun 2011 Last revised: 28 Jul 2016
Date Written: February 25, 2015
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) which 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.
Keywords: Account valuation; consumer credit; collectability scoring; credit collections; GMM estimation; maximum-likelihood estimation; operational statistics; self-exciting point process
JEL Classification: C51, C53, C81, D14, G21
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