The new robust conic GPLM method with an application to finance: prediction of credit default


Ozmen A., Weber G. , Cavusoglu Z., DEFTERLİ Ö.

JOURNAL OF GLOBAL OPTIMIZATION, vol.56, no.2, pp.233-249, 2013 (Journal Indexed in SCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 56 Issue: 2
  • Publication Date: 2013
  • Doi Number: 10.1007/s10898-012-9902-7
  • Title of Journal : JOURNAL OF GLOBAL OPTIMIZATION
  • Page Numbers: pp.233-249
  • Keywords: Predicting default probabilities, Uncertainty, Robust optimization, RCMARS, Robust conic generalized partial linear model, PARTIAL LINEAR-MODELS, OPTIMIZATION

Abstract

This paper contributes to classification and identification in modern finance through advanced optimization. In the last few decades, financial misalignments and, thereby, financial crises have been increasing in numbers due to the rearrangement of the financial world. In this study, as one of the most remarkable of these, countries' debt crises, which result from illiquidity, are tried to predict with some macroeconomic variables. The methodology consists of a combination of two predictive regression models, logistic regression and robust conic multivariate adaptive regression splines (RCMARS), as linear and nonlinear parts of a generalized partial linear model. RCMARS has an advantage of coping with the noise in both input and output data and of obtaining more consistent optimization results than CMARS. An advanced version of conic generalized partial linear model which includes robustification of the data set is introduced: robust conic generalized partial linear model (RCGPLM). This new model is applied on a data set that belongs to 45 emerging markets with 1,019 observations between the years 1980 and 2005.