Modelling take-up and profitability

Modelling take-up and profitability

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Article ID: iaor2010933
Volume: 61
Issue: 3
Start Page Number: 430
End Page Number: 442
Publication Date: Mar 2010
Journal: Journal of the Operational Research Society
Authors: , ,
Keywords: credit
Abstract:

We use response data collected by a lender to estimate the probabilities of loan offers being accepted by the applicants and the survival probabilities of default and of paying back early. Combining all those together we estimated the expected profit surface for the lender at the time of application before making an offer to an applicant. The results show how a lender could find the optimal interest rate to increase the expected profit or its market share. We also consider how different optimal decision policies could be applied to different market segments.

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