The Banking and Finance Review

Estimation of the Probability of Credit Card Charge-Off in the Presence of Competing Risks

Shermineh Haghani


The primary reasons for credit card charge-off are delinquency and bankruptcy. In this paper, we estimate the probability of credit card charge-off using a competing risks model with two cause specific hazard functions, one for delinquency and the other for bankruptcy. In addition, we allow the two cause specific hazard functions to depend on unobserved heterogeneities that can be mutually dependent. This allows us to account for unobserved covariates and to investigate the interdependence between the cause specific hazard functions. We find the two cause specific hazard functions are interdependent through the correlation of the unobserved heterogeneities. We also find that the estimated coefficients of the observed covariates are generally the same, regardless of incorporating unobserved heterogeneities or dependence between them. However, we show that omitting unobserved heterogeneities lowers the predictive accuracy of the probability of charge-off.



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