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Dynamic Valuation of Delinquent Credit-Card Accounts

Author

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  • Naveed Chehrazi

    (Department of Information, Risk, and Operations Management, McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

  • Thomas A. Weber

    (Management of Technology and Entrepreneurship Institute, École Polytechnique Fédérale de Lausanne, CH-1015 Lausanne, Switzerland)

Abstract

This paper introduces a dynamic model of the stochastic repayment behavior exhibited by delinquent credit-card accounts. Based on this model, we construct a dynamic collectability score (DCS) that estimates the account-specific probability of collecting a given portion of the outstanding debt over any given time horizon. The model integrates a variety of information sources, including historical repayment data, account-specific, and time-varying macroeconomic covariates, as well as scheduled account-treatment actions. Two model-identification methods are examined, based on maximum-likelihood estimation and the generalized method of moments. The latter allows for an operational-statistics approach, combining model estimation and performance optimization by tailoring the estimation error to business-relevant loss functions. The DCS framework is applied to a large set of account-level repayment data. The improvements in classification and prediction performance compared to standard bank-internal scoring methods are found to be significant. This paper was accepted by Noah Gans, stochastic models and simulation .

Suggested Citation

  • Naveed Chehrazi & Thomas A. Weber, 2015. "Dynamic Valuation of Delinquent Credit-Card Accounts," Management Science, INFORMS, vol. 61(12), pages 3077-3096, December.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:12:p:3077-3096
    DOI: 10.1287/mnsc.2015.2203
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    Cited by:

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    4. Shoghi , Amirhossein, 2019. "Debt Collection Industry: Machine Learning Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(4), pages 453-473, October.
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    6. Xianghua Lu & Tian Lu & Chong (Alex) Wang & Ruofan Wu, 2021. "Can Social Notifications Help to Mitigate Payment Delinquency in Online Peer‐to‐Peer Lending?," Production and Operations Management, Production and Operations Management Society, vol. 30(8), pages 2564-2585, August.

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