Variable selection and oversampling in the use of smooth support vector machines for predicting the default risk of companies

Wolfgang Härdle, Yuh-Jye Lee, Dorothea Schäfer*, Yi Ren Yeh

*Corresponding author for this work

Research output: Contribution to journalArticle

44 Scopus citations

Abstract

In the era of Basel II a powerful tool for bankruptcy prognosis is vital for banks. The tool must be precise but also easily adaptable to the bank's objectives regarding the relation of false acceptances (Type I error) and false rejections (Type II error). We explore the suitability of smooth support vector machines (SSVM), and investigate how important factors such as the selection of appropriate accounting ratios (predictors), length of training period and structure of the training sample infl uence the precision of prediction. Moreover, we show that oversampling can be employed to control the trade-off between error types, and we compare SSVM with both logistic and discriminant analysis. Finally, we illustrate graphically how different models can be used jointly to support the decision-making process of loan offi cers.

Original languageEnglish
Pages (from-to)512-534
Number of pages23
JournalJournal of Forecasting
Volume28
Issue number6
DOIs
StatePublished - 1 Sep 2009

Keywords

  • Insolvency prognosis
  • Non-parametric classifi cation
  • Statistical learning theory
  • Support vector machines

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