34,523 research outputs found
Operations research in consumer finance: challenges for operational research
No full textConsumer finance has become one of the most important areas of banking both because of the amount of money being lent and the impact of such credit on the global economy and the realisation that the credit crunch of 2008 was partly due to incorrect modelling of the risks in such lending. This paper reviews the development of credit scoring,-the way of assessing risk in consumer finance- and what is meant by a credit score. It then outlines ten challenges for Operational Research to support modelling in consumer finance. Some of these are to developing more robust risk assessment systems while others are to expand the use of such modelling to deal with the current objectives of lenders and the new decisions they have to make in consumer financ
Optimal score cutoffs and pricing in regulatory capital in retail credit portfolios
No full textThis paper addresses the risk cutoff policies of a retail bank whose objectives are to maximize return on equity for shareholders and live within regulatory capital requirements, such as those of the Basel Capital Accord, to meet unexpected default losses. It investigates the changes that have to be made in the operating decision of which applicants for loans to accept and which to reject because of the changes in the financial regulations imposed on the bank. It is assumed that portfolios consist entirely of consumer credit accounts (mortgages, auto loans, revolving credit etc) for which acquisition risk scores are available to the lender and regulator. The solutions that we obtain not only yield an optimal cutoff score for default risk but also optimal pricing conditions for additional equity capital in the event that the existing level can not satisfy the regulatory requirements. The paper concludes with several numerical examples illustrating the effects of current and proposed Basel regulations. We believe that some important insights are derived from this formulation linking the financial variables such as the lending and borrowing rates, and the debt and equity structure of the lender and the operational decisions of which level of risk to set as the cutoff in the consumer credit portfolios
Application of survival analysis to cash flow modelling for mortgage products
No full textIn this article we describe the construction and implementation of a pricing model for a leading UK mortgage lender. The crisis in mortgage lending has highlighted the importance of incorporating default risk into such pricing decisions b y mortgage lenders. In this case the underlying default model is based on survival analysis, which allows the estimation of month-to-month default probabilities at a customer level. The Cox proportional hazards estimation approach adopted is able to incorporate both endogenous variables (customer specific attributes) and time-covariates relating to the macro-economy. This allows the lender to construct a hypothetical mortgage portfolio, specify one or more economic scenarios, and forecast discounted monthly cashflow for the lifetime of the loans. Monte Carlo simulation is used to compute different realisations of default and attrition rates for the portfolio over a future time horizon and thereby estimate a distribution of likely profit. This differs from a traditional scorecard approach in that it is possible to forecast default rates continually over a time period rather than within a fixed horizon, which allows the simulation of cashflow, and differs from the company's existing pricing model in incorporating the possibilities of both default and early closur
It's the economy stupid: comparison of proportional hazards models with economic and socio-demographic variables for estimating the purchase of financial products
No full textRelatively there is little empirical research that has been taken to understand how the underlying economy affects customers’ subsequent financial product purchase behaviours. A better understanding of this influence and being able to predict the probability of purchasing are important for financial service industries. This paper undertakes an examination of the impacts of social-demographic and economic variables on the probability of purchasing financial products. In particular two most common, the Cox and Weibull, proportional hazard models are compared to examine their adequacy in terms of predictive ability. The results show that the change of external economic environment is an important source that drives customers’ financial products purchasing behaviours. Furthermore, the results also that indicate Cox proportional hazard models are superior to Weibull proportional hazard models
Time will tell: behavioural scoring and the dynamics of consumer credit assessment
No full textThis paper discusses the use of dynamic modelling in consumer credit risk assessment. It surveys the approaches and objectives of behavioural scoring, customer scoring and profit scoring. It then investigates how Markov chain stochastic processes can be used to model the dynamics of the delinquency status and behavioural scores of consumers. It discusses the use of segmentation, mover-stayer models and the use of second and third order models to improve the fit of such models. An alternative survival analysis proportional hazards approach to estimating when default occurs is considered. Comparisons are made between the way credit risk is modelled in consumer lending and corporate lending
Games, theory and applications
No full textAnyone with a knowledge of basic mathematics will find this an accessible and informative introduction to game theory. It opens with the theory of two-person zero-sum games, two-person non-zero sum games, and n-person games, at a level between nonmathematical introductory books and technical mathematical game theory books. Succeeding sections focus on a variety of applications-including introductory explanations of gaming and meta games-that offer nonspecialists information about new areas of game theory at a comprehensible level. Numerous exercises appear with full solutions, in addition to an extensive bibliography, 80 problems with worked solutions, and over 30 illustrations useful for the theory of non-zero and n-person games
The best banking strategy when playing the Weakest Link
No full textThe paper uses dynamic programming to investigate when contestants should bank their current winnings in the TV quiz show , the Weakest Link. It obtains the optimal strategy for the team as a whole and then looks at two possible reasons why the contestants tend to use other strategies in reality
Thomas Grisell letter to Thomas Rotch, 2nd mo 19th 1823
No full textThomas Grisell's letter reached the Rotch household several months before the unexpected death of Thomas Rotch in August, 1823. This is the last letter of the series and presumably the author learned of his friend's death before another letter was penned. 7.95" x 10" (20.2 by 25.5 cm
- …
