Binned Variable

From Open Risk Manual

Definition

A Binned Variable in the context of Quantitative Risk Management is any variable that is generated via the discretization of Numerical Variable into a defined set of bins (intervals). Binned variables can be used in the representation of a Risk Model, encoding Explanatory Variables, Risk Factor

Methods

  • Uniform interval binning, which can be based on N subdivisions of the variable range, or some other approach
  • Data adapted binning
    • Unsupervised, with reference to the statistical distribution of the variable itself
    • Supervised, with reference to the statistical distribution of other variables

Issues and Challenges

  • Binning improves usability for some datasets, which needs to be offset against the potential loss of information through binning

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