Factorial Network Models To Improve P2P Credit Risk Management

Ahelegbey, Daniel Felix and Giudici, Paolo and Hadji-Misheva, Branka (2019): Factorial Network Models To Improve P2P Credit Risk Management.

Abstract

This paper investigates how to improve statistical-based credit scoring of SMEs involved in P2P lending. The methodology discussed in the paper is a factor network-based segmentation for credit score modeling. The approach first constructs a network of SMEs where links emerge from comovement of latent factors, which allows us to segment the heterogeneous population into clusters. We then build a credit score model for each cluster via lasso logistic regression. We compare our approach with the conventional logistic model by analyzing the credit score of over 15000 SMEs engaged in P2P lending services across Europe. The result reveals that credit risk modeling using our network-based segmentation achieves higher predictive performance than the conventional model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Risk, Factor models, Fintech, Peer-to-Peer lending, Credit Scoring, Lasso, Segmentation
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C38 - Classification Methods ; Cluster Analysis ; Principal Components ; Factor Models; G - Financial Economics > G2 - Financial Institutions and Services

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