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The construction of empirical credit scoring rules based on maximization principles

Lieli, R. P.; White, H.

Journal of econometrics. VOL 157; NUMBER 1, ; 2010, 110-119 -- Elsevier Science B.V., Amsterdam. (pages 110-119) -- 2010

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  • Title:
    The construction of empirical credit scoring rules based on maximization principles
  • Author: Lieli, R. P.;
    White, H.
  • Found In: Journal of econometrics. VOL 157; NUMBER 1, ; 2010, 110-119
  • Journal Title: Journal of econometrics.
  • Subjects: Economics; LCC: HB139; Dewey: 330.015195
  • Publication Details: Elsevier Science B.V., Amsterdam.
  • Language: English
  • Abstract: We examine the econometric implications of the decision problem faced by a profit/utility-maximizing lender operating in a simple ''double-binary'' environment, where the two actions available are ''approve'' or ''reject'', and the two states of the world are ''pay back'' or ''default''. In practice, such decisions are often made by applying a fixed cutoff to the maximum likelihood estimate of a parametric model of the default probability. Following (Elliott and Lieli, 2007), we argue that this practice might contradict the lender's economic objective and, using German loan data, we illustrate the use of ''context-specific'' cutoffs and an estimation method derived directly from the lender's problem. We also provide a brief discussion of how to incorporate legal constraints, such as the prohibition of disparate treatment of potential borrowers, into the lender's problem.
  • Identifier: Journal ISSN: 0304-4076
  • Publication Date: 2010
  • Physical Description: Electronic
  • Accrual Information: Monthly
  • Shelfmark(s): 4972.400000
  • UIN: ETOCRN271340861

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