Structural models in consumer credit

  • de Andrade F
  • Thomas L
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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. © 2006 Elsevier B.V. All rights reserved.

Author-supplied keywords

  • Consumer lending
  • Credit risk
  • Finance
  • Portfolio modelling
  • Stochastic processes

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Authors

  • Fabio Wendling Muniz de Andrade

  • Lyn Thomas

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