Optimizing Fraud Detection in Indonesia via Rare-Event Logit Approach: A Simulation Study on Large-Scale

Agung Tri Utomo; Abdul Rahman

doi:10.61255/jeemba.v4i1.1309

Authors

Agung Tri Utomo Universitas Negeri Makassar, Indonesia
Abdul Rahman Universitas Negeri Makassar, Indonesia

DOI:

https://doi.org/10.61255/jeemba.v4i1.1309

Keywords:

Fraud Detection, Rare-Event Logit, Class Imbalance, Simulation Study, Financial Risk

Abstract

Purpose: This study examines the use of the Rare-Event Logit approach to improve fraud detection under conditions of extreme class imbalance. The topic is important because fraud cases usually represent only a very small proportion of total financial transactions, which may reduce the accuracy of conventional classification models.

Design/methodology/approach: This study uses a simulation-based quantitative design to evaluate fraud detection performance in large-scale imbalanced data settings. The analysis compares standard logistic regression and Rare-Event Logit with bias-corrected estimation, including Firth’s penalized likelihood approach. Model performance is assessed using the Area Under the Precision-Recall Curve and F1-Score.

Findings/Results: The results show that standard logit and Rare-Event Logit perform similarly under moderate imbalance conditions. However, Rare-Event Logit provides a stronger theoretical advantage in handling rare-event bias and stabilizing parameter estimation as data sparsity increases. This indicates that bias-corrected probabilistic models are more suitable for fraud detection in highly imbalanced environments.

Originality/Value: This study highlights the value of Rare-Event Logit as an alternative approach for fraud detection in rare-event settings. The findings imply that financial institutions can improve fraud risk identification by adopting bias-corrected models that are more robust to class imbalance.

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