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A Discrete Variable Chain Graph for Applicants for Credit

Author

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  • E. Stanghellini
  • K. J. McConway
  • D. J. Hand

Abstract

A bank offering unsecured personal loans may be interested in several related outcome variables, including defaulting on the repayments, early repayment or failing to take up an offered loan. Current predictive models used by banks typically consider such variables individually. However, the fact that they are related to each other, and to many interrelated potential predictor variables, suggests that graphical models may provide an attractive alternative solution. We developed such a model for a data set of 15 variables measured on a set of 14 000 applications for unsecured personal loans. The resulting global model of behaviour enabled us to identify several previously unsuspected relationships of considerable interest to the bank. For example, we discovered important but obscure relationships between taking out insurance, prior delinquency with a credit card and delinquency with the loan.

Suggested Citation

  • E. Stanghellini & K. J. McConway & D. J. Hand, 1999. "A Discrete Variable Chain Graph for Applicants for Credit," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 48(2), pages 239-251.
    • Handle: RePEc:bla:jorssc:v:48:y:1999:i:2:p:239-251
    DOI: 10.1111/1467-9876.00152
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    Cited by:

    1. Elena Stanghellini, 2003. "Monitoring the Behaviour of Credit Card Holders with Graphical Chain Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9‐10), pages 1423-1435, December.
    2. Frank Fabozzi & Omar Masood & Radu Tunaru, 2007. "Discrete Variable Chain Graphical Modelling for Assessing the Effects of Fund Managers' Characteristics on Incentives Satisfaction and Size of Returns," The European Journal of Finance, Taylor & Francis Journals, vol. 13(3), pages 269-282.
    3. L C Thomas & R W Oliver & D J Hand, 2005. "A survey of the issues in consumer credit modelling research," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(9), pages 1006-1015, September.

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