Determining the Target Variable in Credit Scoring Models

Abstract

Determination the target variable is the crucial
point in the whole development process of credit scoring models,
which are an essential part of risk management. Usually some
Good/Bad definition is applied. In this paper we study the effect
of use of indeterminate value of target variable. We explain the
basic principles of logistic regression modelling and definition of
the target variable. Next, the focus is given to introduction of
some of the widely used statistics for model assessment. The main
part of the paper is devoted to development and assessment of
several credit scoring models on real credit data, which are built
up and assessed according various definitions of target variable.
We show that there is a valid reason for some target definitions
to include the indeterminate value into the modelling process, as
it provided us with convincing results.