Depicting Risk Profile over Time: A Novel Multiperiod Loan Default Prediction Approach
Authors: Wang, Zhao; Jiang, Cuiqing; Zhao, Huimin
Journal: MIS Quarterly (2023)
<jats:p>With the rapid development of fintech, the need for dynamic credit risk evaluation is becoming increasingly important. While previous studies on credit scoring have mostly focused on single-period loan default prediction, we call for a new avenue—multiperiod default prediction (MPDP)—to depict risk profiles over time. To address the challenges raised by MPDP, such as monotonic default probability prediction and complex relationship accommodation, we propose a novel approach, hybrid and collective scoring (HACS). We design a hybrid modeling strategy to predict whether and when a borrower will default separately through a default discrimination model and a default time estimation model, respectively, and synthesize them through a probabilistic framework. To accommodate various possible patterns of default time and measure the distribution of default probability over successive time intervals, we propose a joint default modeling method to train the default time estimation model. Empirical evaluations at the model (time-to-default prediction performance and discrimination performance) and mechanism (identifiability and discriminability) levels, as well as impact analyses at th…