credit rating model based on bell-shape distribution

What is it about?

The authors introduce a multi-objective programming to establish the credit rating model. Objective function 1 minimizes the absolute difference between the obligor number proportion and perfect client proportion, following a standard normal distribution. Objective function 2 minimizes the total difference of the deviation between two adjacent credit ratings’ loss rates. This study combines the two objective functions to ensure the obligor number distribution and the monotonicity of the loss rate, and applies genetic algorithm to solve the model.

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Why is it important?

The proposed credit model could help building a reasonable credit rating system, which is the prerequisite of loan pricing; thus, inaccurate credit rating can cause incorrect loss rate estimates and loan pricing.