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A New Model Averaging Approach in Predicting Credit Risk Default

Author

Listed:
  • Paritosh Navinchandra Jha

    (Department of Economics and Management, University of Bergamo, 24129 Bergamo, Italy)

  • Marco Cucculelli

    (Faculty of Economics and Social Sciences, Marche Polytechnic University, 60121 Ancona, Italy)

Abstract

The paper introduces a novel approach to ensemble modeling as a weighted model average technique. The proposed idea is prudent, simple to understand, and easy to implement compared to the Bayesian and frequentist approach. The paper provides both theoretical and empirical contributions for assessing credit risk (probability of default) effectively in a new way by creating an ensemble model as a weighted linear combination of machine learning models. The idea can be generalized to any classification problems in other domains where ensemble-type modeling is a subject of interest and is not limited to an unbalanced dataset or credit risk assessment. The results suggest a better forecasting performance compared to the single best well-known machine learning of parametric, non-parametric, and other ensemble models. The scope of our approach can be extended to any further improvement in estimating weights differently that may be beneficial to enhance the performance of the model average as a future research direction.

Suggested Citation

  • Paritosh Navinchandra Jha & Marco Cucculelli, 2021. "A New Model Averaging Approach in Predicting Credit Risk Default," Risks, MDPI, vol. 9(6), pages 1-15, June.
    • Handle: RePEc:gam:jrisks:v:9:y:2021:i:6:p:114-:d:570809
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    References listed on IDEAS

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