Yang, Bill Huajian (2022): Modeling PathDependent State Transition by a Recurrent Neural Network. Forthcoming in: Big Data and Information Analytics

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Abstract
Rating transition models are widely used for credit risk evaluation. It is not uncommon that a timehomogeneous Markov rating migration model deteriorates quickly after projecting repeatedly for a few periods. This is because the timehomogeneous Markov condition is generally not satisfied. For a credit portfolio, rating transition is usually path dependent. In this paper, we propose a recurrent neural network (RNN) model for modeling pathdependent rating migration. An RNN is a type of artificial neural networks where connections between nodes form a directed graph along a temporal sequence. There are neurons for input and output at each timeperiod. The model is informed by the past behaviours for a loan along the path. Information learned from previous periods propagates to future periods. Experiments show this RNN model is robust.
Item Type:  MPRA Paper 

Original Title:  Modeling PathDependent State Transition by a Recurrent Neural Network 
English Title:  Modeling PathDependent State Transition by a Recurrent Neural Network 
Language:  English 
Keywords:  Pathdependent, rating transition, recurrent neural network, deep learning, Markov property, timehomogeneity 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C13  Estimation: General C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C18  Methodological Issues: General C  Mathematical and Quantitative Methods > C4  Econometric and Statistical Methods: Special Topics > C45  Neural Networks and Related Topics C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C51  Model Construction and Estimation C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C58  Financial Econometrics G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates G  Financial Economics > G1  General Financial Markets > G17  Financial Forecasting and Simulation G  Financial Economics > G3  Corporate Finance and Governance > G32  Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill G  Financial Economics > G3  Corporate Finance and Governance > G33  Bankruptcy ; Liquidation M  Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3  Marketing and Advertising 
Item ID:  114188 
Depositing User:  Dr. Bill Huajian Yang 
Date Deposited:  15 Aug 2022 00:19 
Last Modified:  15 Aug 2022 00:19 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/114188 