Adaptive credit granting policies

Itzhak Venezia*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We analyze here the optimal interest rate determination of a bank that learns about the repayment behavior of its customers from their past behavior. Optimal dynamic methods are first suggested for determining the interest rate for a bank that learns about the probability of default of its borrowers. It is shown that such a bank determines lower than or equal interest rates than a bank that does not adapt its probability of default according to its past experience. Similar results also obtain when the bank learns about the probabilities that its borrowers belong to each of K (K larger than 2) quality groups.

Original languageEnglish
Pages (from-to)269-281
Number of pages13
JournalJournal of Banking and Finance
Volume4
Issue number3
DOIs
StatePublished - 1980

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