The capital requirements formula within the Basel II Accord is based on a Merton one factor model... more The capital requirements formula within the Basel II Accord is based on a Merton one factor model and in the case of credit cards an asset correlation of 4% is assumed. In this paper we estimate the asset correlation for two datasets assuming the one factor model. We find that the asset correlations assumed by Basel II are much higher than those observed in the datasets we analyse. We show the reduction in capital requirements that a typical lender would have if the values we estimated were implemented in the Basel Accord in place of the current values.
European Journal of Operational Research, Dec 1, 2007
Many researchers see the need for reject inference to come from a sample selection problem whereb... more Many researchers see the need for reject inference to come from a sample selection problem whereby a missing variable results in omitted variable bias. Specifically, the success in being accepted for a loan is related to subsequent repayment performance. Accordingly, the residuals of the previous scoring model by which the person is accepted may be correlated with those of a new model that predicts his repayment performance. Unless the correlation between the residuals of the new and old model are reflected in the new model its parameters will be biased. Alternatively, practitioners often see the problem as one of missing data where the relationship in the new model is biased because the behaviour of the omitted cases differs from that of those who make up the sample for a new model. To attempt to correct for this, differential weights are applied to the new cases. The aim of this paper is to see if the use of both a Heckman style sample selection model and the use of sampling weights, together, will improve predictive performance compared with either technique used alone. This paper will use a sample of applicants in which virtually every applicant was accepted. This allows us to compare the actual performance of each model with the performance of models which are based only on accepted cases
European Journal of Operational Research, Nov 1, 1996
... Theory and Methodology A comparison of neural networks and linear scoring models in the credi... more ... Theory and Methodology A comparison of neural networks and linear scoring models in the credit union environment Vijay S. Desai ... in trade journals claim that artificial intelligence and neural networks have yet to make a breakthrough in evaluating cus tomer credit applications ...
Journal of the Operational Research Society, Mar 1, 2010
Many researchers see the need for reject inference to come from a sample selection problem whereb... more Many researchers see the need for reject inference to come from a sample selection problem whereby a missing variable results in omitted variable bias. Specifically, the success in being accepted for a loan is related to subsequent repayment performance. Accordingly, the residuals of the previous scoring model by which the person is accepted may be correlated with those of a new model that predicts his repayment performance. Unless the correlation between the residuals of the new and old model are reflected in the new model its parameters will be biased. Alternatively, practitioners often see the problem as one of missing data where the relationship in the new model is biased because the behaviour of the omitted cases differs from that of those who make up the sample for a new model. To attempt to correct for this, differential weights are applied to the new cases. The aim of this paper is to see if the use of both a Heckman style sample selection model and the use of sampling weights, together, will improve predictive performance compared with either technique used alone. This paper will use a sample of applicants in which virtually every applicant was accepted. This allows us to compare the actual performance of each model with the performance of models which are based only on accepted cases
European Journal of Operational Research, Dec 1, 2007
... Vilcassim and Jain (1991) showed how a continuous-time semi-Markov framework can provide valu... more ... Vilcassim and Jain (1991) showed how a continuous-time semi-Markov framework can provide valuable insights into the dynamics of household behaviour, whilst Jain and Vilcassim (1991) modelled inter-purchase times by means of a non-parametric Cox proportional hazard ...
Ima Journal of Management Mathematics, Apr 1, 1997
The purpose of the paper is to investigate the predictive power of feedforward neural networks an... more The purpose of the paper is to investigate the predictive power of feedforward neural networks and genetic algorithms in comparison to traditional techniques such as linear discriminant analysis and logistic regression. A particular advantage offered by the new techniques is that they ...
Research in International Business and Finance, 2019
This is a PDF file of an article that has undergone enhancements after acceptance, such as the ad... more This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Review of Quantitative Finance and Accounting, 2018
We study the determinants of average pay across all levels of staff seniority for UK banks betwee... more We study the determinants of average pay across all levels of staff seniority for UK banks between 2003 and 2012. We show that pay is affected by agency problems but not by bank operating performance. Average pay does not depend on accounting outcomes at the bank level. By contrast, average pay is positively affected by the presence of a Remuneration Committee and the proportion of Non-Executives on the Board. These findings indicate that bank pay is determined by agency issues, not bank accounting performance. Our results have practical implications for bank shareholders and regulators, suggesting the need for greater transparency in governance of bank pay.
Journal of the Operational Research Society, Sep 1, 2005
If a credit scoring model is built using only applicants who have been previously accepted for cr... more If a credit scoring model is built using only applicants who have been previously accepted for credit such a non-random sample selection may produce bias in the estimated model parameters and accordingly the model's predictions of repayment performance may not be optimal. Previous empirical research suggests that omission of rejected applicants has a detrimental impact on model estimation and prediction. This paper explores the extent to which, given the previous cutoff score applied to decide on accepted applicants, the number of included variables influences the efficacy of a commonly used reject inference technique, reweighting. The analysis benefits from the availability of a rare sample, where virtually no applicant was denied credit. The general indication is that the efficacy of reject inference is little influenced by either model leanness or interaction between model leanness and the rejection rate that determined the sample. However, there remains some hint that very lean models may benefit from reject inference where modelling is conducted on data characterized by a very high rate of applicant rejection.
Journal of the Operational Research Society, Dec 1, 1999
Credit scoring systems are based on Operational Research and statistical models which seek to ide... more Credit scoring systems are based on Operational Research and statistical models which seek to identify who of previous borrowers did or did not default on loans. This study looks at the question when will borrowers default not if they will default. It suggests that some of the reliability modelling approaches may be useful in this context and may help identify who will default as well as when they may default.
The capital requirements formula within the Basel II Accord is based on a Merton one factor model... more The capital requirements formula within the Basel II Accord is based on a Merton one factor model and in the case of credit cards an asset correlation of 4% is assumed. In this paper we estimate the asset correlation for two datasets assuming the one factor model. We find that the asset correlations assumed by Basel II are much higher than those observed in the datasets we analyse. We show the reduction in capital requirements that a typical lender would have if the values we estimated were implemented in the Basel Accord in place of the current values.
European Journal of Operational Research, Dec 1, 2007
Many researchers see the need for reject inference to come from a sample selection problem whereb... more Many researchers see the need for reject inference to come from a sample selection problem whereby a missing variable results in omitted variable bias. Specifically, the success in being accepted for a loan is related to subsequent repayment performance. Accordingly, the residuals of the previous scoring model by which the person is accepted may be correlated with those of a new model that predicts his repayment performance. Unless the correlation between the residuals of the new and old model are reflected in the new model its parameters will be biased. Alternatively, practitioners often see the problem as one of missing data where the relationship in the new model is biased because the behaviour of the omitted cases differs from that of those who make up the sample for a new model. To attempt to correct for this, differential weights are applied to the new cases. The aim of this paper is to see if the use of both a Heckman style sample selection model and the use of sampling weights, together, will improve predictive performance compared with either technique used alone. This paper will use a sample of applicants in which virtually every applicant was accepted. This allows us to compare the actual performance of each model with the performance of models which are based only on accepted cases
European Journal of Operational Research, Nov 1, 1996
... Theory and Methodology A comparison of neural networks and linear scoring models in the credi... more ... Theory and Methodology A comparison of neural networks and linear scoring models in the credit union environment Vijay S. Desai ... in trade journals claim that artificial intelligence and neural networks have yet to make a breakthrough in evaluating cus tomer credit applications ...
Journal of the Operational Research Society, Mar 1, 2010
Many researchers see the need for reject inference to come from a sample selection problem whereb... more Many researchers see the need for reject inference to come from a sample selection problem whereby a missing variable results in omitted variable bias. Specifically, the success in being accepted for a loan is related to subsequent repayment performance. Accordingly, the residuals of the previous scoring model by which the person is accepted may be correlated with those of a new model that predicts his repayment performance. Unless the correlation between the residuals of the new and old model are reflected in the new model its parameters will be biased. Alternatively, practitioners often see the problem as one of missing data where the relationship in the new model is biased because the behaviour of the omitted cases differs from that of those who make up the sample for a new model. To attempt to correct for this, differential weights are applied to the new cases. The aim of this paper is to see if the use of both a Heckman style sample selection model and the use of sampling weights, together, will improve predictive performance compared with either technique used alone. This paper will use a sample of applicants in which virtually every applicant was accepted. This allows us to compare the actual performance of each model with the performance of models which are based only on accepted cases
European Journal of Operational Research, Dec 1, 2007
... Vilcassim and Jain (1991) showed how a continuous-time semi-Markov framework can provide valu... more ... Vilcassim and Jain (1991) showed how a continuous-time semi-Markov framework can provide valuable insights into the dynamics of household behaviour, whilst Jain and Vilcassim (1991) modelled inter-purchase times by means of a non-parametric Cox proportional hazard ...
Ima Journal of Management Mathematics, Apr 1, 1997
The purpose of the paper is to investigate the predictive power of feedforward neural networks an... more The purpose of the paper is to investigate the predictive power of feedforward neural networks and genetic algorithms in comparison to traditional techniques such as linear discriminant analysis and logistic regression. A particular advantage offered by the new techniques is that they ...
Research in International Business and Finance, 2019
This is a PDF file of an article that has undergone enhancements after acceptance, such as the ad... more This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Review of Quantitative Finance and Accounting, 2018
We study the determinants of average pay across all levels of staff seniority for UK banks betwee... more We study the determinants of average pay across all levels of staff seniority for UK banks between 2003 and 2012. We show that pay is affected by agency problems but not by bank operating performance. Average pay does not depend on accounting outcomes at the bank level. By contrast, average pay is positively affected by the presence of a Remuneration Committee and the proportion of Non-Executives on the Board. These findings indicate that bank pay is determined by agency issues, not bank accounting performance. Our results have practical implications for bank shareholders and regulators, suggesting the need for greater transparency in governance of bank pay.
Journal of the Operational Research Society, Sep 1, 2005
If a credit scoring model is built using only applicants who have been previously accepted for cr... more If a credit scoring model is built using only applicants who have been previously accepted for credit such a non-random sample selection may produce bias in the estimated model parameters and accordingly the model's predictions of repayment performance may not be optimal. Previous empirical research suggests that omission of rejected applicants has a detrimental impact on model estimation and prediction. This paper explores the extent to which, given the previous cutoff score applied to decide on accepted applicants, the number of included variables influences the efficacy of a commonly used reject inference technique, reweighting. The analysis benefits from the availability of a rare sample, where virtually no applicant was denied credit. The general indication is that the efficacy of reject inference is little influenced by either model leanness or interaction between model leanness and the rejection rate that determined the sample. However, there remains some hint that very lean models may benefit from reject inference where modelling is conducted on data characterized by a very high rate of applicant rejection.
Journal of the Operational Research Society, Dec 1, 1999
Credit scoring systems are based on Operational Research and statistical models which seek to ide... more Credit scoring systems are based on Operational Research and statistical models which seek to identify who of previous borrowers did or did not default on loans. This study looks at the question when will borrowers default not if they will default. It suggests that some of the reliability modelling approaches may be useful in this context and may help identify who will default as well as when they may default.
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Papers by Jonathan Crook