Assessing credit risks through a scoring model with time-varying parameters

Subject. This article discusses the method of dynamic modeling, namely the building of a scoring model with time-varying parameters. Objectives. The article aims to develop a scoring model with time-varying parameters for assessing credit risks using the data of a microfinance organization as a case study. Methods. For the study, I used a critical review of the literature on the use of dynamic modeling and a combination of classical logistic regression and time series models Results. Based on the analysis of data from a microfinance organization, the article confirms that changes in independent variables may contain a trend. The obtained confirmation is evidence of the temporal dependence of true parameters when using the developed model, which indicates the high efficiency of the scoring model in the framework of assessing the credit risks of a microfinance organization. Cyclical changes in the tested target and independent variables have been empirically proven, which makes it possible to conclude that the true parameters are time-dependent within the framework of the model used. Conclusions and Relevance. The empirical experiment shows that the developed method can significantly improve the efficiency of scoring models in the implementation of a credit risk analysis system in financial institutions. A scoring model with time-varying parameters can be used in the risk management system of any financial institutions.