We propose a consolidated risk measure based on variance and the safety-first principle in a mean-risk portfolio optimization framework. The safety-first principle to financial portfolio selection strategy is modified and improved. Our proposed models are subjected to norm regularization to seek near-optimal stable and sparse portfolios. We compare the cumulative wealth of our preferred proposed model to a benchmark, S&P 500 index for the same period. Our proposed portfolio strategies have better out-of-sample performance than the selected alternative portfolio rules in literature and control the downside risk of the portfolio returns.
This paper studies the peer-to-peer lending and loan application processing of LendingClub. We tried to reproduce the existing loan application processing algorithm and find features used in this process. Loan application processing is considered a binary classification problem. We used the area under the ROC curve (AUC) for evaluation of algorithms. Features were transformed with splines for improving the performance of algorithms. We considered three classification algorithms: logistic regression, buffered AUC (bAUC) maximization, and AUC maximization.With only three features, Debt-to-Income Ratio, Employment Length, and Risk Score, we obtained an AUC close to 1. We have done both in-sample and out-of-sample evaluations. The codes for cross-validation and solving problems in a Portfolio Safeguard (PSG) format are in the Appendix. The calculation results with the data and codes are posted on the website and are available for downloading.
Recent a few years have witnessed the rapid expansion of the peer-to-peer lending marketplace. As a new field of investment and a novel channel of financing, it has drawn extensive attention throughout the world. Many investors have shown great enthusiasm for this field. However, investors are at the disadvantage of information asymmetry, which is a key issue in this marketplace that is unavoidable and can lead to moral hazard or adverse selection. In this paper, we propose an L 1 / 2 -regularized weighted logistic regression model for default prediction of peer-to-peer lending loans from investors’ perspective, which can reduce the impact of information asymmetry in the process of loan decision. Rather than solely focus on the accuracy of the prediction, we take into consideration the different risk preferences of different investors. We try to find a trade-off between the risk of losing principal and that of losing potential investment opportunities on the basis of investors’ risk preferences. Meanwhile, due to the nature of peer-to-peer lending loans, we add an L 1 / 2 -regularization term to reduce the chance of overfitting. Xu’s algorithm for L 1 / 2 -regularization problems is applied to solve our model. We perform training, in-sample test, and out-of-sample test with data from LendingClub. Numerical experiments demonstrate that regularization could enhance out-of-sample the area under the Precision–Recall curve (AUPRC). By applying the proposed model, the risk-averse investors could apply a higher penalty factor to lower the risk of losing principal at the cost of the loss of some potential investment opportunities according to their own risk preferences. This model can help investors reduce the impact of information asymmetry to a great extent.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.