CMARS and GAM & CQP—Modern optimization methods applied to international credit default prediction |
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Authors: | Özge Sezgin Alp Erkan Büyükbebeci Fatma Yerlikaya Özkurt |
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Institution: | a Institute of Applied Mathematics, Middle East Technical University, 06531 Ankara, Turkeyb Faculty of Commercial Sciences, Ba?kent University, 06530 Ankara, Turkeyc Turkish Statistical Institute, 06100 Ankara, Turkeyd Department of Mathematics, Selçuk University, 42697 Konya, Turkeye Department of Mathematics, Dicle University, 21280 Diyarbak?r, Turkey |
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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. |
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Keywords: | Financial mathematics Sovereign defaults Emerging markets CART GAM Logistic regression Regularization MARS CMARS Continuous optimization Conic quadratic programming |
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