An insight into the experimental design for credit risk and corporate bankruptcy prediction systems

Over the last years, it has been observed an increasing interest of the finance and business communities in any application tool related to the prediction of credit and bankruptcy risk, probably due to the need of more robust decision-making systems capable of managing and analyzing complex data. As a result, plentiful techniques have been developed with the aim of producing accurate prediction models that are able to tackle these issues. However, the design of experiments to assess and compare these models has attracted little attention so far, even though it plays an important role in validating and supporting the theoretical evidence of performance. The experimental design should be done carefully for the results to hold significance; otherwise, it might be a potential source of misleading and contradictory conclusions about the benefits of using a particular prediction system. In this work, we review more than 140 papers published in refereed journals within the period 2000–2013, putting the emphasis on the bases of the experimental design in credit scoring and bankruptcy prediction applications. We provide some caveats and guidelines for the usage of databases, data splitting methods, performance evaluation metrics and hypothesis testing procedures in order to converge on a systematic, consistent validation standard.This work has partially been supported by the Mexican Science and Technology Council (CONACYT-Mexico) through a Postdoctoral Fellowship [223351], the Spanish Ministry of Economy under grant TIN2013-46522-P and the Generalitat Valenciana under grant PROMETEOII/2014/062

An Empirical Evaluation of Effort Prediction Models Based on Functional Size Measures

Software development effort estimation is among the most interesting issues for project managers, since reliable estimates are at the base of good planning and project control. Several different techniques have been proposed for effort estimation, and practitioners need evidence, based on which they can choose accurate estimation methods. The work reported here aims at evaluating the accuracy of software development effort estimates that can be obtained via popular techniques, such as those using regression models and those based on analogy. The functional size and the development effort of twenty software development projects were measured, and the resulting dataset was used to derive effort estimation models and evaluate their accuracy. Our data analysis shows that estimation based on the closest analogues provides better results for most models, but very bad estimates in a few cases. To mitigate this behavior, the correction of regression toward the mean proved effective. According to the results of our analysis, it is advisable that regression to the mean correction is used when the estimates are based on closest analogues. Once corrected, the accuracy of analogy-based estimation is not substantially different from the accuracy of regression based models

Methods to Improve the Prediction Accuracy and Performance of Ensemble Models

The application of ensemble predictive models has been an important research area in predicting medical diagnostics, engineering diagnostics, and other related smart devices and related technologies. Most of the current predictive models are complex and not reliable despite numerous efforts in the past by the research community. The performance accuracy of the predictive models have not always been realised due to many factors such as complexity and class imbalance. Therefore there is a need to improve the predictive accuracy of current ensemble models and to enhance their applications and reliability and non-visual predictive tools. The research work presented in this thesis has adopted a pragmatic phased approach to propose and develop new ensemble models using multiple methods and validated the methods through rigorous testing and implementation in different phases. The first phase comprises of empirical investigations on standalone and ensemble algorithms that were carried out to ascertain their performance effects on complexity and simplicity of the classifiers. The second phase comprises of an improved ensemble model based on the integration of Extended Kalman Filter (EKF), Radial Basis Function Network (RBFN) and AdaBoost algorithms. The third phase comprises of an extended model based on early stop concepts, AdaBoost algorithm, and statistical performance of the training samples to minimize overfitting performance of the proposed model. The fourth phase comprises of an enhanced analytical multivariate logistic regression predictive model developed to minimize the complexity and improve prediction accuracy of logistic regression model. To facilitate the practical application of the proposed models; an ensemble non-invasive analytical tool is proposed and developed. The tool links the gap between theoretical concepts and practical application of theories to predict breast cancer survivability. The empirical findings suggested that: (1) increasing the complexity and topology of algorithms does not necessarily lead to a better algorithmic performance, (2) boosting by resampling performs slightly better than boosting by reweighting, (3) the prediction accuracy of the proposed ensemble EKF-RBFN-AdaBoost model performed better than several established ensemble models, (4) the proposed early stopped model converges faster and minimizes overfitting better compare with other models, (5) the proposed multivariate logistic regression concept minimizes the complexity models (6) the performance of the proposed analytical non-invasive tool performed comparatively better than many of the benchmark analytical tools used in predicting breast cancers and diabetics ailments. The research contributions to ensemble practice are: (1) the integration and development of EKF, RBFN and AdaBoost algorithms as an ensemble model, (2) the development and validation of ensemble model based on early stop concepts, AdaBoost, and statistical concepts of the training samples, (3) the development and validation of predictive logistic regression model based on breast cancer, and (4) the development and validation of a non-invasive breast cancer analytic tools based on the proposed and developed predictive models in this thesis. To validate prediction accuracy of ensemble models, in this thesis the proposed models were applied in modelling breast cancer survivability and diabetics’ diagnostic tasks. In comparison with other established models the simulation results of the models showed improved predictive accuracy. The research outlines the benefits of the proposed models, whilst proposes new directions for future work that could further extend and improve the proposed models discussed in this thesis

SMOTE for Learning from Imbalanced Data: Progress and Challenges, Marking the 15-year Anniversary

The Synthetic Minority Oversampling Technique (SMOTE) preprocessing algorithm is considered \de facto" standard in the framework of learning from imbalanced data. This is due to its simplicity in the design of the procedure, as well as its robustness when applied to di erent type of problems. Since its publication in 2002, SMOTE has proven successful in a variety of applications from several di erent domains. SMOTE has also inspired several approaches to counter the issue of class imbalance, and has also signi cantly contributed to new supervised learning paradigms, including multilabel classi cation, incremental learning, semi-supervised learning, multi-instance learning, among others. It is standard benchmark for learning from imbalanced data. It is also featured in a number of di erent software packages | from open source to commercial. In this paper, marking the fteen year anniversary of SMOTE, we re ect on the SMOTE journey, discuss the current state of a airs with SMOTE, its applications, and also identify the next set of challenges to extend SMOTE for Big Data problems.This work have been partially supported by the Spanish Ministry of Science and Technology under projects TIN2014-57251-P, TIN2015-68454-R and TIN2017-89517-P; the Project 887 BigDaP-TOOLS - Ayudas Fundaci on BBVA a Equipos de Investigaci on Cient ca 2016; and the National Science Foundation (NSF) Grant IIS-1447795

Multiple proportion case-basing driven CBRE and its application in the evaluation of possible failure of firms

Case-based reasoning (CBR) is a unique tool for the evaluation of possible failure of firms (EOPFOF) for its eases of interpretation and implementation. Ensemble computing, a variation of group decision in society, provides a potential means of improving predictive performance of CBR-based EOPFOF. This research aims to integrate bagging and proportion case-basing with CBR to generate a method of proportion bagging CBR for EOPFOF. Diverse multiple case bases are first produced by multiple case-basing, in which a volume parameter is introduced to control the size of each case base. Then, the classic case retrieval algorithm is implemented to generate diverse member CBR predictors. Majority voting, the most frequently used mechanism in ensemble computing, is finally used to aggregate outputs of member CBR predictors in order to produce final prediction of the CBR ensemble. In an empirical experiment, we statistically validated the results of the CBR ensemble from multiple case bases by comparing them with those of multivariate discriminant analysis, logistic regression, classic CBR, the best member CBR predictor and bagging CBR ensemble. The results from Chinese EOPFOF prior to 3 years indicate that the new CBR ensemble, which significantly improved CBRs predictive ability, outperformed all the comparative methods

Is "Better Data" Better than "Better Data Miners"? (On the Benefits of Tuning SMOTE for Defect Prediction)

We report and fix an important systematic error in prior studies that ranked classifiers for software analytics. Those studies did not (a) assess classifiers on multiple criteria and they did not (b) study how variations in the data affect the results. Hence, this paper applies (a) multi-criteria tests while (b) fixing the weaker regions of the training data (using SMOTUNED, which is a self-tuning version of SMOTE). This approach leads to dramatically large increases in software defect predictions. When applied in a 5*5 cross-validation study for 3,681 JAVA classes (containing over a million lines of code) from open source systems, SMOTUNED increased AUC and recall by 60% and 20% respectively. These improvements are independent of the classifier used to predict for quality. Same kind of pattern (improvement) was observed when a comparative analysis of SMOTE and SMOTUNED was done against the most recent class imbalance technique. In conclusion, for software analytic tasks like defect prediction, (1) data pre-processing can be more important than classifier choice, (2) ranking studies are incomplete without such pre-processing, and (3) SMOTUNED is a promising candidate for pre-processing.Comment: 10 pages + 2 references. Accepted to International Conference of Software Engineering (ICSE), 201