Firm Default Prediction by GNN with Gravity-Model Informed Neighbor Node Sampling

Abstract

AbstractFirm default prediction is important in credit risk management and understanding economic trends. Both practitioners and academic researchers have long studied it. While traditional statistical methods such as discriminant analysis and logistic regression have been used recently, machine learning and deep learning methods have been widely applied. The graph neural network (GNN) is one of the latest applications of deep-learning approaches. With the use of GNNs, it is possible to reflect the non-linear relationships of features among neighboring companies around the target company, whereas ordinary machine learning and deep learning methods focus only on the features of the target company. However, when handling large-scale graphs such as inter-firm networks, it is difficult to apply vanilla GNNs naively. Although uniform neighbor node sampling is commonly used for large-scale graphs, to the best of our knowledge, no research has focused on better sampling methods for GNN applications for default prediction. From the practical viewpoint, it means which companies should be considered with priority for firm default prediction. In this study, we propose a novel gravity model-informed neighbor sampling method based on the estimated transaction volume by utilizing knowledge from econophysics. The scope of this research is to determine whether we can improve default predictions by considering neighboring companies with larger transaction amounts compared to ordinary uniform sampling. We also verified that the proposed method improves the prediction performance and stability compared to GNNs with other sampling techniques and other machine learning methods using real large-scale inter-firm network data.