Soft-Hard Data Fusion Using Uncertainty Balance Principle – Evidence from Corporate Credit Risk Assessment in Commercial Banking

Brkić, S., Hodžić, M., & Džanić, E. (2019). Soft-Hard Data Fusion Using Uncertainty Balance Principle – Evidence from Corporate Credit Risk Assessment in Commercial Banking. Periodicals in Engineering and Natural Sciences Vol 7 No 3 DOI:10.21533/pen.v7i3.436

14 Pages Posted: 10 Sep 2019

See all articles by Sabina Brkic

Sabina Brkic

American University in Bosnia and Herzegovina

Migdat Hodzic

International University of Sarajevo (IUS)

Enis Dzanic

Date Written: September 2, 2019

Abstract

This study introduces Uncertainty Balance Principle (UBP) as a new concept/method for incorporating additional soft data into probabilistic credit risk assessment models. It shows that soft banking data, used for credit risk assessment, can be expressed and decomposed using UBP and thus enabling more uncertainty to be handled with a precise mathematical methodology. The results show that this approach has relevance to credit risk assessment models in the sense that it proved its usefulness for the purpose of soft-hard data fusion, it modified Probability of Default with soft data modeled using possibilistic (fuzzy) distributions and fused with hard probabilistic data via UBP and it obtained better classification prediction results on the overall sample. This was demonstrated on a simple example of one soft variable, two experts and a small sample and thus this is an approach/method that requires further research, enhancements and rigorous statistical testing for the application to a complete scoring and/or rating system.

Keywords: Soft Data Hard Data, Credit Default, Uncertainty Balance Principle, Expert Opinion, Data Fusion

JEL Classification: C53, G21, G32

Suggested Citation

Brkic, Sabina and Hodzic, Migdat and Dzanic, Enis, Soft-Hard Data Fusion Using Uncertainty Balance Principle – Evidence from Corporate Credit Risk Assessment in Commercial Banking (September 2, 2019). Brkić, S., Hodžić, M., & Džanić, E. (2019). Soft-Hard Data Fusion Using Uncertainty Balance Principle – Evidence from Corporate Credit Risk Assessment in Commercial Banking. Periodicals in Engineering and Natural Sciences Vol 7 No 3 DOI:10.21533/pen.v7i3.436, Available at SSRN: https://ssrn.com/abstract=3446658

Sabina Brkic

American University in Bosnia and Herzegovina ( email )

Mije Keroševića Guje 3
Sarajevo, Tuzla 71000
Bosnia and Herzegovina

Migdat Hodzic

International University of Sarajevo (IUS) ( email )

Hrasnička cesta 15
71210
Bosnia and Herzegovina

No contact information is available for Enis Dzanic

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