CMARS and GAM & CQP-Modern optimization methods applied to international credit default prediction


Alp O. S. , Buyukbebeci E., Cekic A. I. , Ozkurt F. Y. , TAYLAN P., Weber G.

JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS, vol.235, no.16, pp.4639-4651, 2011 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 235 Issue: 16
  • Publication Date: 2011
  • Doi Number: 10.1016/j.cam.2010.04.039
  • Journal Name: JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Page Numbers: pp.4639-4651
  • Keywords: Financial mathematics, Sovereign defaults, Emerging markets, CART, GAM, Logistic regression, Regularization, MARS, CMARS, Continuous optimization, Conic quadratic programming, COUNTRY RISK, POLITICAL INSTABILITY
  • Middle East Technical University Affiliated: Yes

Abstract

In this paper, we apply newly developed methods called GAM & CQP and CMARS for country defaults. These are techniques refined by us using Conic Quadratic Programming. Moreover, we compare these new methods with common and regularly used classification tools, applied on 33 emerging markets' data in the period of 1980-2005. We conclude that GAM & CQP and CMARS provide an efficient alternative in predictions. The aim of this study is to develop a model for predicting the countries' default possibilities with the help of modern techniques of continuous optimization, especially conic quadratic programming. We want to show that the continuous optimization techniques used in data mining are also very successful in financial theory and application. By this paper we contribute to further benefits from model-based methods of applied mathematics in the financial sector. Herewith, we aim to help build up our nations. (C) 2010 Elsevier B.V. All rights reserved.