Article ID: | iaor20031941 |
Country: | United States |
Volume: | 50 |
Issue: | 2 |
Start Page Number: | 277 |
End Page Number: | 289 |
Publication Date: | Mar 2002 |
Journal: | Operations Research |
Authors: | Thomas Lyn, Stepanova Maria |
Keywords: | credit scoring |
Credit scoring is one of the most successful applications of quantitative analysis in business. This paper shows how using survival-analysis tools from reliability and maintenance modeling allow one to build credit-scoring models that assess aspects of profit as well as default. This survival-analysis approach is also finding favor in credit-risk modeling of bond prices. The paper looks at three extensions of Cox's proportional hazards model applied to personal loan data. A new way of coarse-classifying of characteristics using survival-analysis methods is proposed. Also, a number of diagnostic methods to check adequacy of the model fit are tested for suitability with loan data. Finally, including time-by-characteristic interactions is proposed as a way of possible improvement of the model's predictive power.