Hurdle models of repayment behaviour in personal loan contracts

• Published in: Empirical economics Vol. 53; no. 2; pp. 641 - 667
• Main Authors: Murteira, José M. R., Augusto, Mário A. G.
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01-09-2017; Springer Nature B.V
• Subjects: Behavior; Consumer behavior; Econometrics; Economic models; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Finance; Installment loans; Insurance; Management; Panel data; Payments; Personal loans; Random effects; Repayments; Statistics for Business; Loan repayment; C23; Binomial thinning; Beta mixture; G21; C25; Panel count data; Hurdle
• ISSN: 0377-7332; 1435-8921
• DOI: 10.1007/s00181-016-1140-2

This paper proposes a hurdle model of repayment behaviour in loans with fixed instalments. Using information on previous and current contracts, the approach yields a model of customer behaviour, useful, for example, in assessing the impact of determinants of default, a natural concern for credit and behavioural scoring. Under plausible assumptions, a debtor in each period faces a number of missed payments, which depends on his previous repayment decisions; meanwhile, as most debtors are expected to meet financial obligations, the number of missed payments is bound to display excess zeros, with reference to a single-part law. Each sequence of missed payments is modelled by using the binomial thinning, a conceptual tool that allows for dependence between integers by defining the support of consecutive counts. Under suitable assumptions on heterogeneity, the model can be produced under a random effects approach, leading to a two-part panel data model, estimable by quasi-maximum likelihood. The proposed approach is illustrated using a panel data set on personal loans granted by a Portuguese bank.