ABSTRACT
In this chapter, the authors describe several important applications drawn from financial credit modeling, medicine, and text classification. They focus on credit risk — the risk that the debt issuer will default on the debt. Credit risk can be substantial; even single obligor defaults, such as the $30 billion default of WorldCom Inc. Individual consumers, corporations, and governments take on debt to finance various endeavors worldwide. In the aggregate, the amount of debt worldwide is staggering. The authors also describe a model of the probability that the debt issuer will default over a fixed time horizon, given a variety of explanatory variables. Once an obligor has defaulted, the debt issuer and creditor participate in a legal process under which claims against the issuer are resolved. A company’s creditworthiness can affect its ability to raise funds, the value of its debt in the secondary markets, and stock price.
