Binned Variable

Definition

A Binned Variable (also Grouped 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).

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 (for example Quantile Based Binning)
  • Supervised, with reference to the statistical distribution of other variables

Examples

• Binned variables can be used in the representation of a Risk Model, encoding Explanatory Variables or a Risk Factor
• Binning of a continuous Credit Score into a small set of Credit Rating classes

Issues and Challenges

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

See Also

• Coarse Classification