We propose (i) a transformation of the debt service ratio index (DSR) and (ii) present a useful methodology to identify those households in financial risk. Our index DSRM solves some particular problems of the DSR, specifically; it solves the outlier's problem, since our index is bounded in a natural way, and allows to include in the analysis households without any transitory income. Even more, the DSRM is directly related with the DSR, helping to the interpretation of the results. In order to find financial risky households we use a default probit model with lower and upper bounds that allow us to establish an area of financial risk for a household conditional in his DSRM level and others characteristics. We use micro-data from the Survey of Household Finances (SHF) executed by Central Bank of Chile. The results show that Chilean households with a DSR between 30% and 65% suffer a significant increase in their probability of default. However, above that upper bound there is not a significant increase in the probability of default.
Biography: Master of economics Universidad de Chile.
Economist of Department of Finance Research in Central Bank of Chile.