Journal of Risk Model Validation

Risk.net

Modeling and model validation of the impact of the economy on the credit risk of credit card portfolios

Meko M.C. So and Lyn C. Thomas

ABSTRACT

Since the global credit crunch, lenders have recognized how critical it is to assess the default risk of portfolios of consumer borrowing under different economic environments. We describe a Markov chain model for revolving consumer credit accounts based on consumers' behavioral scores that includes the impact of the economy on the risk migration of credit card accounts. We use two credit card data sets, one from Hong Kong and one from the UK, to validate the model, and hence provide empirical evidence to encourage lenders to use macroeconomic measurements to estimate the default risk in credit card portfolios. The models show how economic variables such as unemployment and price indexes have an impact, both directly, by changing the dynamics of the credit scores, and indirectly, by affecting how many credit card accounts become inactive or reactive themselves. The model also shows the difference in impact that economic changes have on transactors and revolvers.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: