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

  • Wolfgang Härdle

    (CASE, Humboldt University, Berlin, Germany)

  • Yuh-Jye Lee

    (Department of Computer Science Information Engineering, National Taiwan University of Science and Technology, Taipei, Taiwan)

  • Dorothea Schäfer

    (German Institute of Economic Research, Berlin, Germany)

  • Yi-Ren Yeh

    (Department of Computer Science Information Engineering, National Taiwan University of Science and Technology, Taipei, Taiwan)

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 influence 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 officers. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1109
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 28 (2009)
Issue (Month): 6 ()
Pages: 512-534

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Handle: RePEc:jof:jforec:v:28:y:2009:i:6:p:512-534
DOI: 10.1002/for.1109
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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