Structural Models in Consumer Credit

29 Pages Posted: 21 Jul 2004

See all articles by Fabio W. M. de Andrade

Fabio W. M. de Andrade

SERASA S.A.; Getulio Vargas Foundation (FGV) - Sao Paulo School of Business Administration

Lyn C. Thomas

University of Southampton - School of Management

Date Written: July 2004

Abstract

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

de Andrade, Fabio W. M. and Thomas, Lyn C., Structural Models in Consumer Credit (July 2004). Available at SSRN: https://ssrn.com/abstract=566962 or http://dx.doi.org/10.2139/ssrn.566962

Fabio W. M. De Andrade (Contact Author)

SERASA S.A. ( email )

Sao Paolo
Brazil

Getulio Vargas Foundation (FGV) - Sao Paulo School of Business Administration

Sao Paulo
BRAZIL

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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