An overview of survival analysis with an application in the credit risk environment

Abstract

Survival analysis has become a popular technique to more accurately model the probability of default in the credit risk environment with the ultimate goal of finding the optimal price for credit. In this paper we present an overview of some of the basic concepts of survival analysis. The focus is specifically on the Cox Proportional Hazards (CPH) model and the mixture cure model, which is a general alternative to the CPH model. A detailed algorithm that can be used to simulate survival times (default times) from a mixture cure model is provided. A parametric CPH and mixture cure model are fitted to a simulated data set and the benefits of fitting the latter model are illustrated.