A New Approach to Short Term Credit in the UK, a publication for our final year DBA candidate, Marko Sjoblom
Congratulations to Marko Sjoblom, a final year doctoral-candidate in our DBA program, whose article “Profitability vs. Credit Score Models—A New Approach to Short Term Credit in the UK” was published in “Theoretical Economics Letters”. The paper was co-authored with Dr. Alessio Castello, Professor on Innovation and Dr. Gregory Gadzinski, Professor on Quantitative Finance.
The results conclude that credit score does not significantly impact profitability in the overdraft market
The profitability lending model was initially discussed by Eisenbeis in 1970‘s, who suggested that it might be possible to build a lending model that prevailed the traditional scorecard models. The peer reviewed paper studies a unique dataset from a personal loan company based in the United Kingdom, which offered overdraft-style short-term loans to individuals with low and high credit scores. The results conclude that credit score does not significantly impact profitability in the overdraft market.
Moreover, the paper argues that, assuming a good understanding of low credit score individuals, a business model that grants loans to these “new” customers is as sustainable and commercially viable as lending to higher credit profile applicants.
The team ran a best subset regression analyses on two samples to investigate which factors have the highest explanatory power. Unlike other studies that use logistic regression as their benchmark model for credit scoring, they used more information than a default/non default binary variable, and hence can run classical multiple regression analyses. Other recent studies have used different variations of Artificial Neural Network (ANN) on large datasets with success but since most ANN models work with binary classification, they have their limitations.
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