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Decision Tree Or Logistic Regression - Which Basic Model Is Better?

Author

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  • Kitti Fodor

    (Department of Business Statistics and Economic Forecasting, Faculty of Economics, University of Miskolc, Miskolc, Hungary)

Abstract

In this paper, my aim is to show which of the data in the Central Credit Information System are the ones that influence the factors that are then used to perform the analysis using a decision tree and logistic regression, and I would like to know, which of the two basic model is the better one. For the analyses, I used a random sample of 500 items, reflecting the proportions of performing and nonperforming loans in the population. For both methods, one variable was found to be significant, which was the ratio of the repayment to the contract amount, so this is the most significant of the data recorded by the Central Credit Information System in terms of loan defaults. If I compare the two methods, I can conclude that both methods have a high level of accuracy, but logistic regression is the one that produced better results, as it was able to identify a higher proportion of defaulted loans. Unfortunately, the decision tree could not identify any defaulting loans despite its higher classification accuracy. The reason can be the unfavourable sample composition. Finally, the logistic regression was able to categorize the transactions with 81,1% accuracy and has better AUC value and better value for Gini coefficients.

Suggested Citation

  • Kitti Fodor, 2023. "Decision Tree Or Logistic Regression - Which Basic Model Is Better?," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 32(2), pages 67-75, December.
  • Handle: RePEc:ora:journl:v:2:y:2023:i:2:p:67-75
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    References listed on IDEAS

    as
    1. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    2. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    3. Frydman, Halina & Altman, Edward I & Kao, Duen-Li, 1985. "Introducing Recursive Partitioning for Financial Classification: The Case of Financial Distress," Journal of Finance, American Finance Association, vol. 40(1), pages 269-291, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    loan default; decision tree; logistic regression; random sample; classification; ROC curve;
    All these keywords.

    JEL classification:

    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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