Internet Financial Credit Risk Assessment with Sliding Window and Attention Mechanism LSTM Model

With the accelerated pace of market-oriented reform, Internet finance has gained a broad and healthy development environment. Existing studies lack consideration of time trends in financial risk, and treating all features equally may lead to inaccurate predictions. To address the above problems, we propose an LSTM model based on sliding window and attention mechanism. The model uses sliding windows to enable the model to effectively exploit the contextual relevance of loan data. And we introduce the attention mechanism into the model, which enables the model to focus on important information. The result on the Lending Club public desensitization dataset shows that our model outperforms ARIMA, SVM, ANN, LSTM, and GRU models

American Option Pricing using Self-Attention GRU and Shapley Value Interpretation

Options, serving as a crucial financial instrument, are used by investors to manage and mitigate their investment risks within the securities market. Precisely predicting the present price of an option enables investors to make informed and efficient decisions. In this paper, we propose a machine learning method for forecasting the prices of SPY (ETF) option based on gated recurrent unit (GRU) and self-attention mechanism. We first partitioned the raw dataset into 15 subsets according to moneyness and days to maturity criteria. For each subset, we matched the corresponding U.S. government bond rates and Implied Volatility Indices. This segmentation allows for a more insightful exploration of the impacts of risk-free rates and underlying volatility on option pricing. Next, we built four different machine learning models, including multilayer perceptron (MLP), long short-term memory (LSTM), self-attention LSTM, and self-attention GRU in comparison to the traditional binomial model. The empirical result shows that self-attention GRU with historical data outperforms other models due to its ability to capture complex temporal dependencies and leverage the contextual information embedded in the historical data. Finally, in order to unveil the "black box" of artificial intelligence, we employed the SHapley Additive exPlanations (SHAP) method to interpret and analyze the prediction results of the self-attention GRU model with historical data. This provides insights into the significance and contributions of different input features on the pricing of American-style options.Comment: Working pape

A Framework for Credit Risk Prediction Using the Optimized-FKSVR Machine Learning Classifier

Transparency is influenced by several crucial factors, such as credit risk (CR) predictions, model reliability, efficient loan processing, etc. The emergence of machine learning (ML) techniques provides a promising solution to address these challenges. However, it is the responsibility of banking or nonbanking organizations to control their approach to incorporate this innovative methodology to mitigate human preferences in loan decision-making. The research article presents the Optimized-Feature based Kernel Support Vector Regression (O-FKSVR) model which is an ML-based CR analysis model in the digital banking. This proposal aims to compare several ML methods to identify a precise model for CR assessment using real credit database information. The goal is to introduce a classification model that uses a hybrid of Stochastic Gradient Descent (SGD) and firefly optimization (FFO) methods with Support Vector Regression (SVR) to predict credit risks in the form of probability, loss given, and exposure at defaults. The proposed  O-FKSVR model extracts features and predicts outcomes based on data gathered from online credit analysis. The proposed O-FKSVR model has increased the accuracy rate and resolved the existing problems. The experimental study is conducted in Python, and the results demonstrate improvements in accuracy, precision, and reduced error rates compared to previous ML methods. The proposed O-FKSVR model has achieved a maximum accuracy rate value of 0.955%, precision value of 0.96%, and recall value of 0.952%, error rate value of 4.4 when compared with the existing models such as SVR, DT, RF, and AdaBoost.&nbsp

Applied Data Science Approaches in FinTech: Innovative Models for Bitcoin Price Dynamics

Living in a data-intensive environment is a natural consequence to the continuous innovations and technological advancements, that created countless opportunities for addressing domain-specific challenges following the Data Science approach. The main objective of this thesis is to present applied Data Science approaches in FinTech, focusing on proposing innovative descriptive and predictive models for studying and exploring Bitcoin Price Dynamics and Bitcoin Price Prediction. With reference to the research area of Bitcoin Price Dynamics, two models are proposed. The first model is a Network Vector Autoregressive model that explains the dynamics of Bitcoin prices, based on a correlation network Vector Autoregressive process that models interconnections between Bitcoin prices from different exchange markets and classical assets prices. The empirical findings show that Bitcoin prices from different markets are highly interrelated, as in an efficiently integrated market, with prices from larger and/or more connected exchange markets driving other prices. The results confirm that Bitcoin prices are unrelated with classical market prices, thus, supporting the diversification benefit property of Bitcoin. The proposed model can predict Bitcoin prices with an error rate of about 11% of the average price. The second proposed model is a Hidden Markov Model that explains the observed time dynamics of Bitcoin prices from different exchange markets, by means of the latent time dynamics of a predefined number of hidden states, to model regime switches between different price vectors, going from "bear'' to "stable'' and "bear'' times. Structured with three hidden states and a diagonal variance-covariance matrix, the model proves that the first hidden state is concentrated in the initial time period where Bitcoin was relatively new and its prices were barely increasing, the second hidden state is mostly concentrated in a period where Bitcoin prices were steadily increasing, while the third hidden state is mostly concentrated in the last period where Bitcoin prices witnessed a high rate of volatility. Moreover, the model shows a good predictive performance when implemented on an out of sample dataset, compared to the same model structured with a full variance-covariance matrix. The third and final proposed model, falls within the area of Bitcoin Price Prediction. A Hybrid Hidden Markov Model and Genetic Algorithm Optimized Long Short Term Memory Network is proposed, aiming at predicting Bitcoin prices accurately, by introducing new features that are not usually considered in the literature. Moreover, to compare the performance of the proposed model to other models, a more traditional ARIMA model has been implemented, as well as a conventional Genetic Algorithm-optimized Long Short Term Memory Network. With a mean squared error of 33.888, a root mean squared error of 5.821 and a mean absolute error of 2.510, the proposed model achieves the lowest errors among all the implemented models, which proves its effectiveness in predicting Bitcoin prices

Forecasting stock closing prices with an application to airline company data

Forecasting stock market movements is a challenging task from the practitioners’ point of view. We explore how model selection via the least absolute shrinkage and selection operator (LASSO) approach can be better used to forecast stock closing prices using real-world datasets of daily stock closing prices of three major international airlines. Combining the LASSO method with multiple external data sources in our model leads to a robust and efficient method to predict stock behavior. We also compare our approach with ridge, tree, and support vector machine regressions, as well as neural network approaches to model the data. We include lags of each external variable and response variable in the model, resulting in a total of 870 predictor variables. The empirical results indicate that the LASSO-fitted model is the most effective when compared to other approaches we consider. The results show that the closing price of an airline stock is affected by its closing price for the previous days and those of other types of airlines and is significantly correlated with the Shanghai Composite Index for the previous day and 3 days prior. Other influencing factors include the positive impact of the Shanghai Composite Index daily share volume, the negative impact of loan interest rates, the amount of highway passenger and railway freight turnover, etc

The new form of financial intermediation: key issues of peer-to-peer lending [védés előtt]

In the previous years, fintech transformation and innovative technological solutions had a significant impact on the economy. This trend reached the financial market as well. Conventional financial institutions introduced a wide range of online products and services. Besides that, a disintermediation tendency has started, and alternative funding models appeared on the market, performing capital allocation. One of this new form is peer-to-peer lending (P2P) or marketplace lending, where the traditional intermediary role is left out of the process. The main idea of the business model is that the online platforms offer more beneficial conditions for borrowers compared to a bank loan. From investor perspective the expected return is promised to be higher than a bank deposit yield. However, the risk associated with this investment is also significantly higher. After the first platform was launched in 2005, the segment showed a robust expansion and several new players appeared on the market in many different countries. The strong market growth raises several questions regarding the future of financial intermediation, the role of the platforms on the financial market and their interaction with commercial banks. The purpose of this dissertation is to gain a comprehensive understanding regarding the relevance of the peer-to-peer lending platforms and to examine the market specific features. The dissertation is divided into two main sections. The first one is a theoretical overview where peer-to-peer lending is defined and embedded into the literature of financial intermediation. Then the main features of the platforms are presented in comparison with the conventional banking sector. After that, the key research directions, current market statistics and regulatory environment are summarized. In the second part, four separate papers are presented. The first two studies are exploring the market specific features, covering the characteristics of the P2P applicants and the examination of the secondary market. The remaining two papers investigate the relevance of the platforms and their potential role on the financial market. They main results of the theoretical overview and the four papers are the following: • When examining the characteristics of P2P borrowers, data was used from a market leader US platform. The results indicate that the portion of delinquent mortgages in a particular state has the highest impact on the demand for P2P funding, and the most 2 commonly declared loan purpose is debt consolidation, which suggests that borrowers need alternative funding to refinance their overdue mortgage debts. Besides that, the results suggest that the customer group of P2P platforms overlaps with bank customers and P2P platforms supplement bank lending only in a small segment and for most of the cases it substitutes bank funding, especially in the lower end of the score distribution. • According to the analysis of the secondary market dataset from a European platform, the market is relatively liquid, the demand is the highest for performing loans with 0 days past due (DPD). The discount rate on the market is quite high, which suggests that the price of liquidity has to be paid by the seller. Additionally, the market seems to be sensitive to external shock, as investors started to liquidate their claims when the pandemic started in Europe. • Based on a benchmark scoring model that we built on a European P2P dataset; we could not confirm that the platform was able to reduce information asymmetry - due to the usage of alternative information - better than traditional financial intermediaries. The average internal rate of return on closed transactions was -4.17%, and 42% of the loans end with a negative IRR. Investors are not compensated for the credit risk they take. • In case of economic distress, the growth rate of marketplace lending is in line with the economic instability of the country and the demand excessively increases from regions with weak banking system. The investigation covered 61 countries with different level of development, covering various regions

SME default prediction: A systematic methodology-focused review

This study reviews the methodologies used in the literature to predict failure in small and medium-sized enterprises (SMEs). We identified 145 SMEs’ default prediction studies from 1972 to early 2023. We summarized the methods used in each study. The focus points are estimation methods, sample re-balancing methods, variable selection techniques, validation methods, and variables included in the literature. More than 1,200 factors used in failure prediction models have been identified, along with 54 unique feature selection techniques and 80 unique estimation methods. Over one-third of the studies do not use any feature selection method, and more than one-quarter use only in-sample validation. Our main recommendation for researchers is to use feature selection and validate results using hold-out samples or cross-validation. As an avenue for further research, we suggest in-depth empirical comparisons of estimation methods, feature selection techniques, and sample re-balancing methods based on some large and commonly used datasets.publishedVersio

Machine Learning methods in climate finance: a systematic review

Evitar la materialización del cambio climático es uno de los principales retos de nuestro tiempo. En esta tarea, el sector financiero desempeña un papel fundamental, motivando a economistas académicos a desarrollar un nuevo campo de investigación, las finanzas climáticas. A la vez, el uso de tecnologías de aprendizaje automático (ML, por sus siglas en inglés) se ha popularizado para analizar problemas relacionados con las finanzas climáticas, debido principalmente a la necesidad de gestionar un volumen elevado de datos relacionados con el clima, y para modelizar relaciones no lineales entre variables climáticas y económicas. De esta manera, proponemos una revisión de la literatura académica para explorar cómo esta tecnología está posibilitando el crecimiento de las finanzas climáticas. Para ello, primero realizamos una búsqueda sistemática de estudios en esta materia en tres bases de datos científicas. Luego, usando un modelo de identificación automática de temas (Latent Dirichlet Allocation), identificamos estadísticamente siete áreas del conocimiento donde el ML está desempeñando un papel relevante: catástrofes naturales, biodiversidad, riesgo agrícola, mercados de carbono, energía, inversión responsable y datos climáticos. Para finalizar, hacemos un análisis de las principales tendencias de publicación, así como una clasificación de los modelos estadísticos utilizados en función del área de estudio. La principal contribución de este artículo es la provisión de una estructura de temas o problemas solventados gracias al uso del ML en finanzas climáticas, lo cual esperamos que facilite a expertos en esta tecnología la comprensión de las principales fortalezas y limitaciones de dicha tecnología aplicada en este campo de investigación.Preventing the materialization of climate change is one of the main challenges of our time. The involvement of the financial sector is a fundamental pillar in this task, which has led to the emergence of a new field in the literature, climate finance. In turn, the use of Machine Learning (ML) as a tool to analyze climate finance is on the rise, due to the need to use big data to collect new climate-related information and model complex non-linear relationships. Considering the proliferation of articles in this field, and the potential for the use of ML, we propose a review of the academic literature to assess how ML is enabling climate finance to scale up. The main contribution of this paper is to provide a structure of application domains in a highly fragmented research field, aiming to spur further innovative work from ML experts. To pursue this objective, first we perform a systematic search of three scientific databases to assemble a corpus of relevant studies. Using topic modeling (Latent Dirichlet Allocation) we uncover representative thematic clusters. This allows us to statistically identify seven granular areas where ML is playing a significant role in climate finance literature: natural hazards, biodiversity, agricultural risk, carbon markets, energy economics, ESG factors & investing, and climate data. Second, we perform an analysis highlighting publication trends; and thirdly, we show a breakdown of ML methods applied by research area

Operational research and artificial intelligence methods in banking

Supplementary materials are available online at https://www.sciencedirect.com/science/article/pii/S037722172200337X?via%3Dihub#sec0031 .Copyright © 2022 The Authors. Banking is a popular topic for empirical and methodological research that applies operational research (OR) and artificial intelligence (AI) methods. This article provides a comprehensive and structured bibliographic survey of OR- and AI-based research devoted to the banking industry over the last decade. The article reviews the main topics of this research, including bank efficiency, risk assessment, bank performance, mergers and acquisitions, banking regulation, customer-related studies, and fintech in the banking industry. The survey results provide comprehensive insights into the contributions of OR and AI methods to banking. Finally, we propose several research directions for future studies that include emerging topics and methods based on the survey results