Structural Models in Consumer Credit
29 Pages Posted: 21 Jul 2004
Date Written: July 2004
We propose a structural credit risk model for consumer lending using option theory and the concept of the value of the consumer's reputation. Using Brazilian empirical data and a credit bureau score as proxy for creditworthiness we compare a number of alternative models before suggesting one that leads to a simple analytical solution for the probability of default. We apply the proposed model to portfolios of consumer loans introducing a factor to account for the mean influence of systemic economic factors on individuals. This results in a hybrid structural-reduced-form model. And comparisons are made with the Basel II approach. Our conclusions partially support that approach for modelling the credit risk of portfolios of retail credit.
Keywords: Credit risk models, consumer credit, Basel II, structural models
JEL Classification: C15, C51, G21, G28
Suggested Citation: Suggested Citation