Structural models in consumer credit |
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Authors: | Fabio Wendling Muniz de Andrade Lyn Thomas |
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Institution: | 1. Serasa S.A., Al. Quinimuras 187, São Paulo, 04068-900, Brazil;2. School of Management, University of Southampton, Southampton, SO17 1BJ, United Kingdom |
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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. |
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Keywords: | Finance Stochastic processes Credit risk Consumer lending Portfolio modelling |
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