Credit Management and Markov Chains: Modified Total Balance Aging Method

Abstract

1. It is first necessary to establish some terminology. Call the end of May 1989 time t, and call the end of June 1989 time t + 1. In each case, refer to the month just completed as age category 1, so that for time t May 1989 is age category 1 and for time t + 1 June 1989 is age category 1. The account data for May and June may then be laid out as follows, with all figures in thousands of pounds:

	Balance at t Partial balance aging
Account no.	Age l	Age 2	Age 3	Total amount	Total balance aging
1	10	—	—	10	1
2	9	2	—	11	2
3	—	—	7	7	3
4	5	6	3	14	3
5	6	11	—	17	2
6	13	15	2	30	3
7	—	8	16	24	3
8	7	4	—	11	2
9	—	—	12	12	3
10	16	—	4	20	3
11	—	10	—	10	2
12	7	14	5	26	3