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

  • Authors:

  • Özge Sezgin Alp;Erkan Büyükbebeci;Ayşegül İşcanoglu Çekiç;Fatma Yerlikaya Özkurt;Pakize Taylan;Gerhard-Wilhelm Weber

  • Affiliations:

  • Institute of Applied Mathematics, Middle East Technical University, 06531 Ankara, Turkey and Faculty of Commercial Sciences, Başkent University, 06530 Ankara, Turkey;Turkish Statistical Institute, 06100 Ankara, Turkey;Institute of Applied Mathematics, Middle East Technical University, 06531 Ankara, Turkey and Department of Mathematics, Selçuk University, 42697 Konya, Turkey;Institute of Applied Mathematics, Middle East Technical University, 06531 Ankara, Turkey;Department of Mathematics, Dicle University, 21280 Diyarbakır, Turkey;Institute of Applied Mathematics, Middle East Technical University, 06531 Ankara, Turkey

  • Venue:
  • Journal of Computational and Applied Mathematics
  • Year:
  • 2011

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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.