Abstract
In some applications of supervised machine learning, it is desirable to trade model complexity with greater interpretability for some covariates while letting other covariates remain a “black box”. An important example is hedonic property valuation modeling, where machine learning techniques typically improve predictive accuracy, but are too opaque for some practical applications that require greater interpretability. This problem can be resolved by certain structured additive regression (STAR) models, which are a rich class of regression models that include the generalized linear model (GLM) and the generalized additive model (GAM). Typically, STAR models are fitted by penalized least-squares approaches. We explain how one can benefit from the excellent predictive capabilities of two advanced machine learning techniques: deep learning and gradient boosting. Furthermore, we show how STAR models can be used for supervised dimension reduction and explain under what circumstances their covariate effects can be described in a transparent way. We apply the methodology to residential land and structure valuation, with very encouraging results regarding both interpretability and predictive performance.
Original language | English |
---|---|
Article number | 193 |
Number of pages | 24 |
Journal | Journal of Risk and Financial Management |
Volume | 15 |
Issue number | 5 |
Early online date | 20 Apr 2022 |
DOIs | |
Publication status | Published - 20 Apr 2022 |
Bibliographical note
Acknowledgments: We thank Nicola Stalder and his IAZI team for preparing the dataset for the Swiss case study. The authors are grateful to the referees, whose feedback and comments have improved the quality of the paper.Keywords
- land and structure valuation
- machine learning
- structured additive regression
- gradient boosting
- deep learning
- interpretability
- transparency
- hedonic modeling