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Capturing non-linear effects in credit risk modelling

Capturing non-linear effects in credit risk modelling


 Hi Team, I have few questions on the aspect of credit risk modeling –
1. This questions me on using WOE technique. When we do WOE, if end up not capturing non-linear relationships. Is there any way to capture non-linear effects while still using WOE ?
2. What is the possibility of using ensemble methods like xgboost or neural networks for prediction ?
3. As you mentioned in the content, Scorecard is a representation of PD coefficients. If so,when predicting using non regression techniques like boosting ,How can we create Scorecard for such ?

1 Answer

365 Team

Hi Phanindra,

  1. Provided your intervals are granular enough, WoE would capture a non-linear relationship.
  2. It is highly likely that such models yield more accurate predictions than a logistic regression model. However, they are not interpretable and, most likely, won’t satisfy regulatory requirements in that respect.
  3. I don’t know of any way to create a scorecard from a model like XGBoost, AdaBoost, etc.

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