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

Author

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  • 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)

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 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.

Suggested Citation

  • Wolfgang Härdle & Yuh-Jye Lee & Dorothea Schäfer & Yi-Ren Yeh, 2009. "Variable selection and oversampling in the use of smooth support vector machines for predicting the default risk of companies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(6), pages 512-534.
    • Handle: RePEc:jof:jforec:v:28:y:2009:i:6:p:512-534
    DOI: 10.1002/for.1109
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    References listed on IDEAS

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