Hybrid model using logit and nonparametric methods for predicting micro-entity failure

Following the calls from literature on bankruptcy, a parsimonious hybrid bankruptcy model is developed in this paper by combining parametric and non-parametric approaches.To this end, the variables with the highest predictive power to detect bankruptcy are selected using logistic regression (LR). Subsequently, alternative non-parametric methods (Multilayer Perceptron, Rough Set, and Classification-Regression Trees) are applied, in turn, to firms classified as either “bankrupt” or “not bankrupt”. Our findings show that hybrid models, particularly those combining LR and Multilayer Perceptron, offer better accuracy performance and interpretability and converge faster than each method implemented in isolation. Moreover, the authors demonstrate that the introduction of non-financial and macroeconomic variables complement financial ratios for bankruptcy prediction

Credit Scoring Based on Hybrid Data Mining Classification

The credit scoring has been regarded as a critical topic. This study proposed four approaches combining with the NN (Neural Network) classifier for features selection that retains sufficient information for classification purpose. Two UCI data sets and different approaches combined with NN classifier were constructed by selecting features. NN classifier combines with conventional statistical LDA, Decision tree, Rough set and F-score approaches as features preprocessing step to optimize feature space by removing both irrelevant and redundant features. The procedure of the proposed algorithm is described first and then evaluated by their performances. The results are compared in combination with NN classifier and nonparametric Wilcoxon signed rank test will be held to show if there has any significant difference between these approaches. Our results suggest that hybrid credit scoring models are robust and effective in finding optimal subsets and the compound procedure is a promising method to the fields of data mining

A literature review on the application of evolutionary computing to credit scoring

The last years have seen the development of many credit scoring models for assessing the creditworthiness of loan applicants. Traditional credit scoring methodology has involved the use of statistical and mathematical programming techniques such as discriminant analysis, linear and logistic regression, linear and quadratic programming, or decision trees. However, the importance of credit grant decisions for financial institutions has caused growing interest in using a variety of computational intelligence techniques. This paper concentrates on evolutionary computing, which is viewed as one of the most promising paradigms of computational intelligence. Taking into account the synergistic relationship between the communities of Economics and Computer Science, the aim of this paper is to summarize the most recent developments in the application of evolutionary algorithms to credit scoring by means of a thorough review of scientific articles published during the period 2000–2012.This work has partially been supported by the Spanish Ministry of Education and Science under grant TIN2009-14205 and the Generalitat Valenciana under grant PROMETEO/2010/028

An academic review: applications of data mining techniques in finance industry

With the development of Internet techniques, data volumes are doubling every two years, faster than predicted by Moore’s Law. Big Data Analytics becomes particularly important for enterprise business. Modern computational technologies will provide effective tools to help understand hugely accumulated data and leverage this information to get insights into the finance industry. In order to get actionable insights into the business, data has become most valuable asset of financial organisations, as there are no physical products in finance industry to manufacture. This is where data mining techniques come to their rescue by allowing access to the right information at the right time. These techniques are used by the finance industry in various areas such as fraud detection, intelligent forecasting, credit rating, loan management, customer profiling, money laundering, marketing and prediction of price movements to name a few. This work aims to survey the research on data mining techniques applied to the finance industry from 2010 to 2015.The review finds that Stock prediction and Credit rating have received most attention of researchers, compared to Loan prediction, Money Laundering and Time Series prediction. Due to the dynamics, uncertainty and variety of data, nonlinear mapping techniques have been deeply studied than linear techniques. Also it has been proved that hybrid methods are more accurate in prediction, closely followed by Neural Network technique. This survey could provide a clue of applications of data mining techniques for finance industry, and a summary of methodologies for researchers in this area. Especially, it could provide a good vision of Data Mining Techniques in computational finance for beginners who want to work in the field of computational finance

Rule Induction Methods For Credit Scoring

Credit scoring is the term used by the credit industry to describe methods used for classifying applicants for credit into risk classes according to their likely repayment behavior (e.g. “default” and “non-default”).  The credit industry has been using such methods as logistic regression, discriminant analysis, and various machine learning techniques to more precisely identify creditworthy applicants who are granted credit, and non-creditworthy applicants who are denied credit.  Accurate classification is of benefit both to the creditor (in terms of increased profit or reduced loss) and to the loan applicant (avoiding overcommitment).  This paper examines historical data from consumer loans issued by a financial institution to individuals that the financial institution deemed to be qualified customers.  The data set consists of the financial attributes of each customer and includes a mixture of loans that the customers paid off or defaulted upon.  The paper uses rule induction methods (decision trees) to predict whether a particular applicant paid off or defaulted upon his/her loan.  The main advantage of decision trees is their ability to generate if-then classification rules which are intuitive and easy to understand. Rules could be explained to business managers who would need to approve their implementation as well as loan applicants as the reason for denying a loan.  The paper compares the correct classification accuracy rates of several decision tree algorithms with other data mining methods proposed in earlier works

How Secure Are Good Loans: Validating Loan-Granting Decisions And Predicting Default Rates On Consumer Loans

The failure or success of the banking industry depends largely on the industrys ability to properly evaluate credit risk. In the consumer-lending context, the banks goal is to maximize income by issuing as many good loans to consumers as possible while avoiding losses associated with bad loans. Mistakes could severely affect profits because the losses associated with one bad loan may undermine the income earned on many good loans. Therefore banks carefully evaluate the financial status of each customer as well as their credit worthiness and weigh them against the banks internal loan-granting policies. Recognizing that even a small improvement in credit scoring accuracy translates into significant future savings, the banking industry and the scientific community have been employing various machine learning and traditional statistical techniques to improve credit risk prediction accuracy.This paper examines historical data from consumer loans issued by a financial institution to individuals that the financial institution deemed to be qualified customers. The data consists of the financial attributes of each customer and includes a mixture of loans that the customers paid off and defaulted upon. The paper uses three different data mining techniques (decision trees, neural networks, logit regression) and the ensemble model, which combines the three techniques, to predict whether a particular customer defaulted or paid off his/her loan. The paper then compares the effectiveness of each technique and analyzes the risk of default inherent in each loan and group of loans. The data mining classification techniques and analysis can enable banks to more precisely classify consumers into various credit risk groups. Knowing what risk group a consumer falls into would allow a bank to fine tune its lending policies by recognizing high risk groups of consumers to whom loans should not be issued, and identifying safer loans that should be issued, on terms commensurate with the risk of default

Rule based Model for Credit Evaluation using Rough Set Approach

Credit plays an important role in the economy. Credit Evaluation of any potential credit application has remained a challenge for banks all over the world till today. Credit evaluation can be defined as a technique that helps lenders to decide whether to grant credit to consumers or not. Its increasing importance can be seen from the growing popularity and application of credit scoring. It is mandatory not only to construct effective credit scoring models to help improve the bottom-line of credit providers, but also to design rule based system for effective credit evaluation system. This paper approaches the use of rough set technique to generate rule based system for credit scoring model