A new mixture model for the estimation of credit card exposure at default

Mindy Leow, Jonathan Crook

Research output: Working paper

Abstract / Description of output

Using a large portfolio of historical observations on defaulted loans, we estimate Exposure at Default (EAD) at the level of the obligor by estimating the outstanding balance of an account, not only at the time of default, but at any time over the entire loan period. We theorize that the outstanding balance on a credit card account at any time during the loan is a function of the spending and repayment amounts by the borrower and is also subject to the credit limit imposed by the card issuer. The predicted value is a weighted average of the estimated balance and limit, with weights depending on how likely the borrower is to have a balance greater than the limit. The weights are estimated using a discrete-time repeated events survival model to predict the probability of an account having a balance greater than its limit. The expected balance and expected limit are estimated using two panel models with random effects. We are able to get considerably more accurate predictions for outstanding balance, not only at the time of default, but at any time over the entire default loan period, than other techniques in the literature and that are used in practice.
Original languageEnglish
Number of pages28
Publication statusPublished - 2013

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