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The problem of variable selection for financial distress: applying GRASP methaeuristics

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  • Laura Nuñez

    () (Instituto de Empresa)

Abstract

We use the GRASP procedure to select a subset of financial ratios that are then used to estimate a model of logistic regression to anticipate financial distress on a sample of Spanish firms. The algorithm we suggest is designed "ad-hoc" for this type of variables. Reducing dimensionality has several advantages such as reducing the cost of data acquisition, better understanding of the final classification model, and increasing the efficiency and the efficacy. The application of the GRASP procedure to preselect a reduced subset of financial ratios generated better results than those obtained directly by applying a model of logistic regression to the set of the 141 original financial ratios.

Suggested Citation

  • Laura Nuñez, 2004. "The problem of variable selection for financial distress: applying GRASP methaeuristics," Working Papers Economia wp04-30, Instituto de Empresa, Area of Economic Environment.
  • Handle: RePEc:emp:wpaper:wp04-30
    as

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    File URL: http://latienda.ie.edu/working_papers_economia/WP04-30.pdf
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    References listed on IDEAS

    as
    1. Becchetti, Leonardo & Sierra, Jaime, 2003. "Bankruptcy risk and productive efficiency in manufacturing firms," Journal of Banking & Finance, Elsevier, vol. 27(11), pages 2099-2120, November.
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    4. Varetto, Franco, 1998. "Genetic algorithms applications in the analysis of insolvency risk," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1421-1439, October.
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    6. Evi Neophytou & Cecilio Mar Molinero, 2004. "Predicting Corporate Failure in the UK: A Multidimensional Scaling Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 677-710.
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    More about this item

    Keywords

    Genetic algorithms; Financial distress; Failure; Financial ratios; Variable selection; GRASP; Metaheuristic;

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