Journal
OMEGA-INTERNATIONAL JOURNAL OF MANAGEMENT SCIENCE
Volume 105, Issue -, Pages -Publisher
PERGAMON-ELSEVIER SCIENCE LTD
DOI: 10.1016/j.omega.2021.102520
Keywords
Business analytics; Credit risk; Network Science; Multilayer Networks; Agricultural Lending
Funding
- Natural Sciences and Engineering Research Council of Canada (NSERC) [RGPIN-2020-07114]
- Canada Research Chairs program
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This study presents a multilayer network model for credit risk assessment and finds that including centrality multilayer network information in the model can significantly improve predictive gains. The results suggest that default risk is highest when an individual is connected to many defaulters, but this risk can be mitigated by the size of the individual's neighborhood, showing that default risk and financial stability propagate throughout the network.
We present a multilayer network model for credit risk assessment. Our model accounts for multiple connections between borrowers (such as their geographic location and their economic activity) and allows for explicitly modelling the interaction between connected borrowers. We develop a multilayer personalized PageRank algorithm that allows quantifying the strength of the default exposure of any borrower in the network. We test our methodology in an agricultural lending framework, where it has been suspected for a long time default correlates between borrowers when they are subject to the same structural risks. Our results show there are significant predictive gains just by including centrality multilayer network information in the model, and these gains are increased by more complex information such as the multilayer PageRank variables. The results suggest default risk is highest when an individual is connected to many defaulters, but this risk is mitigated by the size of the neighbourhood of the individual, showing both default risk and financial stability propagate throughout the network. (C) 2021 Elsevier Ltd. All rights reserved.
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