A two-stage model for dealing with temporal degradation of credit scoring

TL;DR

This paper introduces a two-stage model designed to address the issue of temporal degradation in credit scoring, demonstrating promising results over a one-year period and suggesting potential for broader risk assessment applications.

Contribution

The paper presents a novel two-stage modeling approach specifically targeting temporal degradation in credit scoring models, with initial validation showing effective performance over a one-year horizon.

Findings

Motivating results in a 1-year horizon

Potential for extension to longer time frames

Future improvements include economic cycle integration

Abstract

This work is attached to the BRICS 2013 competition. We propose a two-stage model for dealing with the temporal degradation of credit scoring models. This methodology produced motivating results in a 1-year horizon. We anticipate that it can be extended to other applications of risk assessment with great success. Future extensions should cover predictions in larger time frames and consider lagged periods. This methodology can be further improved if more information about the economic cycles is integrated in the forecasting of default.