Whittaker, Joseph and Somers, M. (2007) Quantile regression for modelling distribution of profit and loss. European Journal of Operational Research, 183 (3). pp. 1477-1487. ISSN 0377-2217Full text not available from this repository.
Quantile regression is applied in two retail credit risk assessment exercises exemplifying the power of the technique to account for the diverse distributions that arise in the financial service industry. The first application is to predict loss given default for secured loans, in particular retail mortgages. This is an asymmetric process since where the security (such as a property) value exceeds the loan balance the banks cannot retain the profit, whereas when the security does not cover the value of the defaulting loan then the bank realises a loss. In the light of this asymmetry it becomes apparent that estimating the low tail of the house value is much more relevant for estimating likely losses than estimates of the average value where in most cases no loss is realised. In our application quantile regression is used to estimate the distribution of property values realised on repossession that is then used to calculate loss given default estimates. An illustration is given for a mortgage portfolio from a European mortgage lender. A second application is to revenue modelling. While credit issuing organisations have access to large databases, they also build models to assess the likely effects of new strategies for which, by definition, there is no existing data. Certain strategies are aimed at increasing the revenue stream or decreasing the risk in specific market segments. Using a simple artificial revenue model, quantile regression is applied to elucidate the details of subsets of accounts, such as the least profitable, as predicted from their covariates. The application uses standard linear and kernel smoothed quantile regression.
|Journal or Publication Title:||European Journal of Operational Research|
|Additional Information:||RAE_import_type : Journal article RAE_uoa_type : Statistics and Operational Research|
|Uncontrolled Keywords:||Regression ; Basel II ; Credit scoring ; Haircut distribution ; Kernel regression ; Loss given default ; Profit assessment ; Revenue modelling|
|Subjects:||Q Science > QA Mathematics|
|Departments:||Faculty of Science and Technology > Mathematics and Statistics|
|Deposited On:||29 Mar 2008 12:03|
|Last Modified:||26 Jul 2012 16:25|
Actions (login required)