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Credit risk classification: an integrated predictive accuracy algorithm using artificial and deep neural networks

Author

Listed:
  • Mohammad Mahbobi

    (Thompson Rivers University)

  • Salman Kimiagari

    (Thompson Rivers University)

  • Marriappan Vasudevan

    (Thompson Rivers University)

Abstract

This study utilizes classification models to provide a robust algorithm for imbalanced data where the minority class is of the interest, that is, in the context of default payments. In developing an integrated predictive accuracy algorithm, this study proposes machine learning classifiers and applies DNN, SVM, KNN, and ANN. The proposed algorithm utilizes a 30,000 imbalanced dataset to improve the accuracy of the prediction of default payments by implementing oversampling and undersampling strategies, such as synthetic minority oversampling technique (SMOTE), SVM SMOTE, random undersampling, and ALL-KNN. The results indicate that the SVM under the ALL-KNN sampling technique is able to achieve an accuracy of 98.6%, with the lowest cross entropy loss measurement of 0.028. Through the accurate implementation of the neural networks and neurons used in the proposed algorithm, this paper presents better insights into the functioning of the neural networks when used in conjunction with the resampling techniques. Using the methodology and algorithm presented in this study, credit risk assessments can be more accurately predicted in practical applications where most of the clients are categorized as non-default payments.

Suggested Citation

  • Mohammad Mahbobi & Salman Kimiagari & Marriappan Vasudevan, 2023. "Credit risk classification: an integrated predictive accuracy algorithm using artificial and deep neural networks," Annals of Operations Research, Springer, vol. 330(1), pages 609-637, November.
    • Handle: RePEc:spr:annopr:v:330:y:2023:i:1:d:10.1007_s10479-021-04114-z
    DOI: 10.1007/s10479-021-04114-z
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