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Improving Classifier Performance Assessment of Credit Scoring Models

  • Raffaella Calabrese

    (Dynamics Lab, Geary Institute, University College Dublin)

In evaluating credit scoring predictive power it is common to use the Re-ceiver Operating Characteristics (ROC) curve, the Area Under the Curve(AUC) and the minimum probability-weighted loss. The main weakness of the rst two assessments is not to take the costs of misclassi cation errors into account and the last one depends on the number of defaults in the credit portfolio. The main purposes of this paper are to provide a curve, called curve of Misclassi cation Error Loss (MEL), and a classi er performance measure that overcome the above-mentioned drawbacks. We prove that the ROC dominance is equivalent to the MEL dominance. Furthermore, we derive the probability distribution of the proposed predictive power measure and we analyse its performance by Monte Carlo simulations. Finally, we apply the suggested methodologies to empirical data on Italian Small and Medium Enterprisers.

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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201204.

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Length: 22 pages
Date of creation: 20 Feb 2012
Date of revision:
Handle: RePEc:ucd:wpaper:201204
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  1. Dirk Tasche, 2002. "Remarks on the monotonicity of default probabilities," Papers cond-mat/0207555, arXiv.org.
  2. Hand D.J. & Vinciotti V., 2003. "Local Versus Global Models for Classification Problems: Fitting Models Where it Matters," The American Statistician, American Statistical Association, vol. 57, pages 124-131, May.
  3. Stein, Roger M., 2005. "The relationship between default prediction and lending profits: Integrating ROC analysis and loan pricing," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1213-1236, May.
  4. Altman, Edward I. & Haldeman, Robert G. & Narayanan, P., 1977. "ZETATM analysis A new model to identify bankruptcy risk of corporations," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 29-54, June.
  5. Fantazzini, Dean, 2008. "Credit Risk Management," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 12(4), pages 84-137.
  6. Crook, Jonathan N. & Edelman, David B. & Thomas, Lyn C., 2007. "Recent developments in consumer credit risk assessment," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1447-1465, December.
  7. Dirk Tasche, 2006. "Validation of internal rating systems and PD estimates," Papers physics/0606071, arXiv.org.
  8. Raffaella Calabrese & Silvia Angela Osmetti, 2011. "Generalized Extreme Value Regression for Binary Rare Events Data: an Application to Credit Defaults," Working Papers 201120, Geary Institute, University College Dublin.
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