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Discrete-time discrete-state latent Markov modelling for assessing and predicting household acquisitions of financial products.

Authors
Disciplines
  • Economics
  • Psychology
  • Social Sciences

Abstract

rssa_A1112.dvi © 2007 Royal Statistical Society 0964–1998/07/170955 J. R. Statist. Soc. A (2007) 170, Part 4, pp. 955–974 Discrete time, discrete state latent Markov modelling for assessing and predicting household acquisitions of financial products Leonard J. Paas, Vrije Universiteit, Amsterdam, The Netherlands Jeroen K. Vermunt Tilburg University, The Netherlands and Tammo H. A. Bijmolt University of Groningen, The Netherlands [Received February 2006. Final revision December 2006] Summary. The paper demonstrates application of the latent Markov model for assessing devel- opments by individuals through stages of a process. This approach is applied by using a data- base on ownership of 12 financial products and various demographic variables. The latent Markov model derives latent classes, representing household product portfolios, and shows the relationship between class membership and household demographics. The analysis provides insight into switching between the latent classes, reflecting developments of individual house- hold product portfolios, and the effects of demographics on such switches. Based on this, we formulate equations to predict future acquisitions of financial products. The model accurately predicts which product a specific household unit acquires next, for most of the products. Keywords: Acquisition pattern analysis; Financial products; Forecasting; Hidden Markov model; Hierarchies of characteristics; Latent Markov model 1. Introduction In economics, psychology and other social sciences, researchers investigate the order in which individuals or household units acquire the characteristics defining the stages of a process. Exam- ples are the order in which some individuals use different types of illicit drugs (Collins and Wugalter, 1992; Graham et al., 1991), the order in which children acquire various types of intel- lectual skills and abilities (Kingma, 1984; Verweij et al., 1999) and the order in which household units acquire durable or financia

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