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An economic model for credit assessment problems using screening approaches

Author

Listed:
  • H-T Tsai

    (National Sun Yat-Sen University Kaohsiung)

  • L C Thomas

    (University of Southampton)

  • H-C Yeh

    (National Pingtung Institute of Commerce)

Abstract

How to combine varying credit information collected from various sources at difference periods for the purpose of credit assessment is an important issue for some financial companies. In this article, the screening procedures using individual cut and linear cut approaches are proposed to solve the issue and to control default rates in credit assessment problems. Then, an economic screening model is provided to incorporate with the proposed approaches so that optimal cutoff points are determined by maximizing total profit. An example of a loan programme is illustrated the use of the proposed economic screening procedures. The results show that the linear cut approach uniformly outperforms the individual cut approach in terms of total profit and computation complexity. Moreover, the linear cut approach can be easily extended to the case with multiple variables and the solution is also in a closed form. Therefore, the screening procedure using the linear cut approach is strongly recommended for credit assessment problems.

Suggested Citation

  • H-T Tsai & L C Thomas & H-C Yeh, 2005. "An economic model for credit assessment problems using screening approaches," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(7), pages 836-843, July.
  • Handle: RePEc:pal:jorsoc:v:56:y:2005:i:7:d:10.1057_palgrave.jors.2601911
    DOI: 10.1057/palgrave.jors.2601911
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    References listed on IDEAS

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    1. Wiginton, John C., 1980. "A Note on the Comparison of Logit and Discriminant Models of Consumer Credit Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 757-770, September.
    2. Orgler, Yair E, 1970. "A Credit Scoring Model for Commercial Loans," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 435-445, November.
    3. Lane, Sylvia, 1972. "Submarginal Credit Risk Classification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(1), pages 1379-1385, January.
    4. Herbert Moskowitz & Hsien-Tang Tsai, 1988. "A One-Sided Double Screening Procedure Using Individual Unit Misclassification Error," Management Science, INFORMS, vol. 34(9), pages 1139-1153, September.
    5. Herbert Moskowitz & Robert Plante & Hsien-Tang Tsai, 1993. "A Multistage Screening Model for Evaluation and Control of Misclassification Error in the Detection of Hypertension," Management Science, INFORMS, vol. 39(3), pages 307-321, March.
    6. Jeannie Gouras Thomas & D. B. Owen & R. F. Gunst, 1977. "Improving the Use of Educational Tests as Selection Tools," Journal of Educational and Behavioral Statistics, , vol. 2(1), pages 55-77, March.
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    Cited by:

    1. Xing, Jin & Chi, Guotai & Pan, Ancheng, 2024. "Instance-dependent misclassification cost-sensitive learning for default prediction," Research in International Business and Finance, Elsevier, vol. 69(C).

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    Keywords

    credit; scoring; scorecard; screening;
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