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Forecasting business failure in China using case-based reasoning with hybrid case respresentation

  • Hui Li

    (School of Business Administration, Zhejiang Normal University, PR China)

  • Jie Sun

    (School of Business Administration, Zhejiang Normal University, PR China)

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    Case-based reasoning (CBR) is a very effective and easily understandable method for solving real-world problems. Business failure prediction (BFP) is a forecasting tool that helps people make more precise decisions. CBR-based BFP is a hot topic in today's global financial crisis. Case representation is critical when forecasting business failure with CBR. This research describes a pioneer investigation on hybrid case representation by employing principal component analysis (PCA), a feature extraction method, along with stepwise multivariate discriminant analysis (MDA), a feature selection approach. In this process, sample cases are represented with all available financial ratios, i.e., features. Next, the stepwise MDA is used to select optimal features to produce a reduced-case representation. Finally, PCA is employed to extract the final information representing the sample cases. All data signified by hybrid case representation are recorded in a case library, and the k -nearest-neighbor algorithm is used to make the forecasting. Thus we constructed a hybrid CBR (HCBR) by integrating hybrid case representation into the forecasting tool. We empirically tested the performance of HCBR with data collected for short-term BFP of Chinese listed companies. Empirical results indicated that HCBR can produce more promising prediction performance than MDA, logistic regression, classical CBR, and support vector machine. Copyright © 2009 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

    Volume (Year): 29 (2010)
    Issue (Month): 5 ()
    Pages: 486-501

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    Handle: RePEc:jof:jforec:v:29:y:2010:i:5:p:486-501
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