Optimal Binning of Continuous and Categorical Variables
Description
Tool for easy and efficient discretization of continuous and categorical data.
The package calculates the most optimal binning of a given explanatory variable with respect to a
user-specified target variable. The purpose is to assign a unique Weight-of-Evidence value
to each of the calculated binpoints in order to recode the original variable.
The package allows users to impose certain restrictions on the functional form on the resulting
binning while maximizing the overall information value in the original data.
The package is well suited for logistic scoring models where input variables may be subject to
restrictions such as linearity by e.g. regulatory authorities. An excellent source describing in
detail the development of scorecards, and the role of Weight-of-Evidence coding in credit scoring
is (Siddiqi 2006, ISBN: 978<80><93>0-471<80><93>75451<80><93>0). The package utilizes the discrete nature of decision trees and
Isotonic Regression to accommodate the trade-off between flexible functional forms and maximum
information value.