Generalized Gloves of Neural Additive Models: Pursuing transparent and accurate machine learning models in finance

For many years, machine learning methods have been used in a wide range of fields, including computer vision and natural language processing. While machine learning methods have significantly improved model performance over traditional methods, their black-box structure makes it difficult for researchers to interpret results. For highly regulated financial industries, transparency, explainability, and fairness are equally, if not more, important than accuracy. Without meeting regulated requirements, even highly accurate machine learning methods are unlikely to be accepted. We address this issue by introducing a novel class of transparent and interpretable machine learning algorithms known as generalized gloves of neural additive models. The generalized gloves of neural additive models separate features into three categories: linear features, individual nonlinear features, and interacted nonlinear features. Additionally, interactions in the last category are only local. The linear and nonlinear components are distinguished by a stepwise selection algorithm, and interacted groups are carefully verified by applying additive separation criteria. Empirical results demonstrate that generalized gloves of neural additive models provide optimal accuracy with the simplest architecture, allowing for a highly accurate, transparent, and explainable approach to machine learning.