Dynamic Credit-Collections Optimization

Management Science, Forthcoming

45 Pages Posted: 14 Apr 2015 Last revised: 27 Feb 2018

See all articles by Naveed Chehrazi

Naveed Chehrazi

Washington University in St. Louis - John M. Olin Business School

Peter Glynn

Stanford University

Thomas A. Weber

Ecole Polytechnique Federale de Lausanne - MTEI

Date Written: February 14, 2018

Abstract

Based on a dynamic model of the stochastic repayment behavior exhibited by delinquent credit-card accounts as a self-exciting point process, a bank can control the arrival intensity of repayments using costly account-treatment actions. A semi-analytic solution to the corresponding stochastic optimal control problem is obtained using a recursive approach. For an affine cost of treatment interventions, the optimal policy in the two-dimensional (intensity, balance)-space is described by the frontier of the connected (but nonconvex) action region. The optimal policy significantly reduces a bank's loss given default and concentrates the collection effort onto the best possible interventions at the best possible times, so as to minimize the sum of the expected discounted outstanding balance and the discounted cost of the collection effort, thus maximizing the net value of any given delinquent credit-card account.

Keywords: account valuation, consumer credit, credit collections, impulse control, self-exciting point process, stochastic optimization

JEL Classification: C51, C53, C81, D14, G21

Suggested Citation

Chehrazi, Naveed and Glynn, Peter and Weber, Thomas A., Dynamic Credit-Collections Optimization (February 14, 2018). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2593728

Naveed Chehrazi (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Peter Glynn

Stanford University ( email )

Stanford, CA 94305
United States

Thomas A. Weber

Ecole Polytechnique Federale de Lausanne - MTEI ( email )

Odyssea
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Lausanne, 1015
Switzerland
+41 (0)21 693 01 41 (Phone)
+41 (0)21 693 00 20 (Fax)

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