In the PD model building world, “indeterminate” seems to have more than one meaning. If any readers feel they could give a balanced view of common usage in Australia (or elsewhere), please do so and this blog will record it and adopt it.
Meaning #1: a status of an account at a point in time which is not “in default” but is some way down the track to being considered “in default”. For example, if the CC default definition requires 90DPD, accounts might be called “indeterminate” if they are 60DPD – or whatever other “not completely good” your default definition might permit.
Meaning #1.1: a meaning derived from #1 can then be evolved for the status of an account across a time window such as an OW for modelling purposes. “Indeterminate” might now mean “ever went indeterminate during the OW without ever going intodefault during the OW”. However, one also sees composite definitions of Indeterminate across an OW such as “ever went 60DPD or went 30DPD on two occasions”.
The idea behind the above definitions of Indeterminate is that the account, whilst known not to be “Bad”, is also known not to be completely “Good”. IIUC these above meanings are the most common in the banking industry but your corrections will be tallied and recorded here.
It will also be handy to adopt the likewise common terminology “Bad” for “in default”, along with “Good” and “Indeterminate” and their abbreviations “B,G,I”. These are used in textbooks for technical formulas like odds ratios and information values AWML. In today’s post this usage remains casual and by “G” might be meant “not B” or perhaps in another context “not I nor B”.
Meaning #1.1.1: A special situation related to #1.1 deserves noting. As it stands, #1.1 means that the account was known not to have gone bad during the OW. It isn’t a situation of doubt as to the outcome (contrary to what the English word “indeterminate” connotes). However, one particular case does involve reasonable doubt: when an account has reached the penultimate stage at the end of the OW – for example, a CC has gone 60DPD in the last month of the OW where the default definition is 90DPD. Unlike other Indeterminates that may have gone 60DPD and then rehabilitated, with this “horizoned” account one doesn’t know which of the categories G, I or B it should really belong to. OK, it belongs to “I”, but not in the same sense as an account that reached 60DPD and then rehabilitated during the OW.
Meaning #2: More like the natural English usage, this meaning covers situations where one isn’t sure about assigning “G” or “B”. For example, consider application modelling with an OW of 24 months:
- An account closes good after only 2 MOB. Is this a “Good” account? Not in the same sense as one that was exposed to risk for the full 24 months. One might call it indeterminate in the sense that one doesn’t know whether it would have been G or B if it had hung around for 24 months. I prefer the more specific term “closed good” for this situation.
- (Similar to above) Only the first few MOB are known because the account opened recently. I prefer the more specific terms “out of sample” or “out of time” for these situations.
- For whatever other reasons, such as incomplete data, one doesn’t know the exact outcome of some account at some point in time or across some time window.
This post is only about the nomenclature, and is not even definitive on that point! As to what you do or don’t use “indeterminate” for in the modelling world, that subject is too long for this week.