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

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The paper demonstrates application of the latent Markov model for assessing developments by individuals through stages of a process. This approach is applied by using a database 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 household 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

Document Type: Research Article


Affiliations: 1: Vrije Universiteit, Amsterdam, The Netherlands 2: Tilburg University, The Netherlands 3: University of Groningen, The Netherlands

Publication date: October 1, 2007

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