Post by Sapphire Capital on Aug 21, 2008 22:48:27 GMT 4
Development and Validation of Credit Scoring Models
Dennis Glennon
Government of the United States of America - General
Nicholas M. Kiefer
Cornell University - Department of Economics
C. Erik Larson
Promontory Financial Group
Hwan-Sik Choi
Texas A&M University - Department of Economics
Journal of Credit Risk, Forthcoming
Abstract:
Accurate credit-granting decisions are crucial to the efficiency of the decentralized capital allocation mechanisms in modern market economies. Credit bureaus and many financial institutions have developed and used credit-scoring models to standardize and automate, to the extent possible, credit decisions. We build credit scoring models for bankcard markets using the Office of the Comptroller of the Currency, Risk Analysis Division (OCC/RAD) consumer credit database (CCDB). This unusually rich data set allows us to evaluate a number of methods in common practice. We introduce, estimate, and validate our models, using both out-of-sample contemporaneous and future validation data sets. Model performance is compared using both separation and accuracy measures. A vendor-developed generic bureau-based score is also included in the model performance comparisons. Our results indicate that current industry practices, when carefully applied, can produce models that robustly rank-order potential borrowers both at the time of development and through the near future. However, these same methodologies are likely to fail when the the objective is to accurately estimate future rates of delinquency or probabilities of default for individual or groups of borrowers.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1180302_code262790.pdf?abstractid=1180302&mirid=2
Dennis Glennon
Government of the United States of America - General
Nicholas M. Kiefer
Cornell University - Department of Economics
C. Erik Larson
Promontory Financial Group
Hwan-Sik Choi
Texas A&M University - Department of Economics
Journal of Credit Risk, Forthcoming
Abstract:
Accurate credit-granting decisions are crucial to the efficiency of the decentralized capital allocation mechanisms in modern market economies. Credit bureaus and many financial institutions have developed and used credit-scoring models to standardize and automate, to the extent possible, credit decisions. We build credit scoring models for bankcard markets using the Office of the Comptroller of the Currency, Risk Analysis Division (OCC/RAD) consumer credit database (CCDB). This unusually rich data set allows us to evaluate a number of methods in common practice. We introduce, estimate, and validate our models, using both out-of-sample contemporaneous and future validation data sets. Model performance is compared using both separation and accuracy measures. A vendor-developed generic bureau-based score is also included in the model performance comparisons. Our results indicate that current industry practices, when carefully applied, can produce models that robustly rank-order potential borrowers both at the time of development and through the near future. However, these same methodologies are likely to fail when the the objective is to accurately estimate future rates of delinquency or probabilities of default for individual or groups of borrowers.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1180302_code262790.pdf?abstractid=1180302&mirid=2