Using multi-state markov models to identify credit card risk

Régis, Daniel Evangelista; Artes, Rinaldo

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The main interest of this work is to analyze the application of multi-state Markov models to evaluate credit card risk by investigating the characteristics of different state transitions in client-institution relationships over time, thereby generating score models for various purposes. We also used logistic regression models to compare the results with those obtained using multi-state Markov models. The models were applied to an actual database of a Brazilian financial institution. In this application, multi-state Markov models performed better than logistic regression models in predicting default risk, and logistic regression models performed better in predicting cancellation risk.


Credit scoring. Survival analysis. Multi-state Markov models. Credit cards. Markov processes.


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