Estimation Procedures of Using Five Alternative Machine Learning Methods for Predicting Credit Card Default

Huei-Wen Teng and Michael Lee

Chapter 101 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 3545-3572 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Machine learning has successful applications in credit risk management, portfolio management, automatic trading, and fraud detection, to name a few, in the domain of financial technology. Reformulating and solving these topics adequately and accurately is problem specific and challenging along with the availability of complex and voluminous data. In credit risk management, one major problem is to predict the default of credit card holders using real data set. We review five machine learning methods: the k-nearest neighbors, decision trees, boosting, support vector machine, and neural networks, and apply them to the above problem. In addition, we give explicit Python scripts to conduct analysis using a data set of 29,999 instances with 23 features collected from a major bank in Taiwan, downloadable in the UC Irvine Machine Learning Repository. We show that the decision tree performs best among others in terms of validation curves.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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