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Modeling Repayment Behavior of Consumer Loan in Portfolio across Business Cycle: A Triplet Markov Model Approach

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  • Shou Chen
  • Xiangqian Jiang

Abstract

With a view to develop a more realistic model for credit risk analysis in consumer loan, our paper addresses the problem of how to incorporate business cycles into a repayment behavior model of consumer loan in portfolio. A particular Triplet Markov Model (TMM) is presented and introduced to describe the dynamic repayment behavior of consumers. The particular TMM can simultaneously capture the phases of business cycles, transition of systematic credit risk of a loan portfolio, and Markov repayment behavior of consumers. The corresponding Markov chain Monte Carlo algorithms of the particular TMM are also developed for estimating the model parameters. We show how the transition of consumers’ repayment states and systematic credit risk of a loan portfolio are affected by the phases of business cycles through simulations.

Suggested Citation

  • Shou Chen & Xiangqian Jiang, 2020. "Modeling Repayment Behavior of Consumer Loan in Portfolio across Business Cycle: A Triplet Markov Model Approach," Complexity, Hindawi, vol. 2020, pages 1-11, January.
    • Handle: RePEc:hin:complx:5458941
    DOI: 10.1155/2020/5458941
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    Cited by:

    1. Gangloff, Hugo & Morales, Katherine & Petetin, Yohan, 2023. "Deep parameterizations of pairwise and triplet Markov models for unsupervised classification of sequential data," Computational Statistics & Data Analysis, Elsevier, vol. 180(C).

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