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An Optimal Credit Scoring Model Based on the Maximum Default Identification Ability for Chinese Small Business

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  • Xuepeng Bai
  • Zhichong Zhao
  • Juan L. G. Guirao

Abstract

The reasonable credit scoring model must have strong default identification ability, which means the credit scoring can effectively distinguish between defaulting and nondefaulting customers. The premise to determine the credit score of small enterprises is to determine the weight of indicators. This paper studies 3,045 Chinese small business loans, and two novel weighting methods “Wilks’ Lambda method†and “AUC value method†are proposed, The greater the weight they meet, the greater the ability of default identification. The five weighting methods of “Wilks’ lambda method,†“AUC value method,†“G1 method,†“entropy method,†and “mean square variance method†are compared. An important contribution of the paper is to discover that Wilks’ Lambda method is the most effective method for small business.

Suggested Citation

  • Xuepeng Bai & Zhichong Zhao & Juan L. G. Guirao, 2022. "An Optimal Credit Scoring Model Based on the Maximum Default Identification Ability for Chinese Small Business," Discrete Dynamics in Nature and Society, Hindawi, vol. 2022, pages 1-14, January.
    • Handle: RePEc:hin:jnddns:1551937
    DOI: 10.1155/2022/1551937
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