Lifetime probability of default: Cox model with time-dependent covariates using maximum likelihood
thesisposted on 2022-03-28, 01:55 authored by Mark Thackham
Credit granting institutions need to estimate the probability of default, the chance a customer fails to make repayments as promised (BIS (2006) and IASB (2014)). The Cox model with time-varying covariates (Cox (1972), Crowley and Hu (1977)) is a technique often applied due to its substantial benefits beyond classification approaches (such as logistic regression) whilst achieving similar accuracy (Lessmann et al. (2015), Bellotti and Crook(2009)). However partial likelihood estimation of this model has two shortcomings that remain unaddressed in the literature: (1) the baseline hazard is not estimated, so calculating probabilities requires a further estimation step; and (2) a covariance matrix for both regression parameters and the baseline hazard is not produced. We address these by developing a maximum likelihood method that jointly estimates regression coefficients and the baseline hazard using constrained optimisation that ensures the baseline hazard’s non-negativity. We show in a simulation our technique is more accurate in moderate sized samples and when applied to real home loan data it produces a smoother estimate of the baseline hazard than the Breslow (1972) estimator. Our model could be used to predict life-time probability of default, required under the International Financial Reporting Standard (IFRS) 9 accounting standard.
Table of Contents1. Introduction -- 2. Background to survival analysis -- 3. Literature review -- 4. Maximum likelihood estimation for Cox model with time-varying covariates -- 5. Results -- 6. Conclusion and discussion -- 7. Appendix -- Supplementary material -- References.
NotesEmpirical thesis. Bibliography: pages 65-68
Awarding InstitutionMacquarie University
Degree TypeThesis MRes
DegreeMRes, Macquarie University, Faculty of Science and Engineering, Department of Statistics
Department, Centre or SchoolDepartment of Statistics
Year of Award2016
Principal SupervisorJun Ma
RightsCopyright Mark Thackham 2016. Copyright disclaimer: http://mq.edu.au/library/copyright
Extent1 online resource ([vii], 68 pages)
Former Identifiersmq:69073 http://hdl.handle.net/1959.14/1250438
International Financial Reporting Standard 9 (IFRS)Default (Finance)survival analysisDefault (Finance) -- Mathematical modelsProbabilities -- Mathematical modelstime-dependent covariatestime-varying covariatesBasel IICox modelProbabilitiescredit riskadvanced internal ratings based approach (AIRB)bankinglifetime probability of default (LD)