Corporate Bankruptcy Prediction

Bankruptcy prediction is one of the most important research areas in corporate finance. Bankruptcies are an indispensable element of the functioning of the market economy, and at the same time generate significant losses for stakeholders. Hence, this book was established to collect the results of research on the latest trends in predicting the bankruptcy of enterprises. It suggests models developed for different countries using both traditional and more advanced methods. Problems connected with predicting bankruptcy during periods of prosperity and recession, the selection of appropriate explanatory variables, as well as the dynamization of models are presented. The reliability of financial data and the validity of the audit are also referenced. Thus, I hope that this book will inspire you to undertake new research in the field of forecasting the risk of bankruptcy

Forecasting Financial Distress With Machine Learning – A Review

Purpose – Evaluate the various academic researches with multiple views on credit risk and artificial intelligence (AI) and their evolution.Theoretical framework – The study is divided as follows: Section 1 introduces the article. Section 2 deals with credit risk and its relationship with computational models and techniques. Section 3 presents the methodology. Section 4 addresses a discussion of the results and challenges on the topic. Finally, section 5 presents the conclusions.Design/methodology/approach – A systematic review of the literature was carried out without defining the time period and using the Web of Science and Scopus database.Findings – The application of computational technology in the scope of credit risk analysis has drawn attention in a unique way. It was found that the demand for identification and introduction of new variables, classifiers and more assertive methods is constant. The effort to improve the interpretation of data and models is intense.Research, Practical & Social implications – It contributes to the verification of the theory, providing information in relation to the most used methods and techniques, it brings a wide analysis to deepen the knowledge of the factors and variables on the theme. It categorizes the lines of research and provides a summary of the literature, which serves as a reference, in addition to suggesting future research.Originality/value – Research in the area of Artificial Intelligence and Machine Learning is recent and requires attention and investigation, thus, this study contributes to the opening of new views in order to deepen the work on this topic

ПРОГНОЗ ФІНАНСОВИХ ПРОБЛЕМ, ВИКОРИСТОВУЮЧИ МЕТАЕВРИСТИЧНІ МОДЕЛІ

Investors need to assess and analyze the financial statement, to make the logical decision. Using financial ratios is one of the most common methods. The main purpose of this research is to predict the financial crisis, using ratios of liquidity. Four models, Support vector machine, neural network back propagation, Decision trees and Adaptive Neuro–Fuzzy Inference System has been compared.Furthermore, the ratios of liquidity considered in a period of 89_93. The research method is qualitative and quantitative and type of casual comparative. The result indicates that the accuracy of the neural network, Decision tree, and Adaptive Neuro–Fuzzy Inference System showed that there is a significant differently 0/000 and 0/005 years this is more than support vector machine result. Therefore the result of support vector machine showed that there is a significant differently 0/001 in years. This has been shown that neural network in 2 years before the bankruptcy has the ability to predict a right thing. Therefore, the results have been shown that all four models were statistically significant. Consequently, there are no significant differences. All models have the precision to predict the financial crisis.Инвесторам необходимо оценить и проанализировать финансовую отчетность, принять логическое решение. Использование финансовых показателей является одним из самых распространенных методов. Основная цель этого исследования – прогнозировать финансовый кризис, используя соотношение ликвидности. Четыре модели: векторные машины поддержки, обратное распространение нейронных сетей, дерево решений и адаптивная нейро–нечеткая система вывода. Кроме того, коэффициенты ликвидности рассмотрены в период 2011–2015 гг. Метод исследования является качественным и количественным, а также тип случайной сравнительной. Результат показывает точность нейронной сети, дерево решений, и система Adaptive Neuro–Fuzzy Inference показала, что значительно отличается от 0/000 и 0/005 лет, это больше, чем поддержка векторной машины. Поэтому результат поддержки векторной машины показал, что существует значительно по–разному 0/001 лет. Это показало, что нейронная сеть за 2 года до банкротства имеет возможность прогнозировать правильно. Поэтому результаты показали, что все четыре модели были статистически значимыми. Итак, существенных различий нет. Все модели имеют точность прогнозирования финансового кризиса.Інвесторам необхідно оцінити та проаналізувати фінансову звітність, прийняти логічне рішення. Використання фінансових показників є одним з найпоширеніших методів. Основна мета цього дослідження – прогнозувати фінансову кризу, використовуючи співвідношення ліквідності. Чотири моделі: векторні машини підтримки, зворотне розповсюдження нейронних мереж, дерево рішень та адаптивна  система нейро–нечіткого висновку. Крім того, коефіцієнти ліквідності розглянуті в період 2011–2015 рр. Метод дослідження є якісним та кількісним, а також тип випадкової порівняльної. Результат показує точність нейронної мережі, дерево рішень, і система Adaptive Neuro–Fuzzy Inference показала, що значно відрізняється від 0/000 і 0/005 років, це більше, ніж підтримка векторної машини. Тому результат підтримки векторної машини показав, що існує значно по–різному 0/001 років. Це показало, що нейронна мережа за 2 роки до банкрутства має можливість прогнозувати правильну річ. Тому результати показали, що всі чотири моделі були статистично значущими. Отже, істотних відмінностей немає. Всі моделі мають точність прогнозування фінансової кризи

Fuzzy Logic and Its Uses in Finance: A Systematic Review Exploring Its Potential to Deal with Banking Crises

The major success of fuzzy logic in the field of remote control opened the door to its application in many other fields, including finance. However, there has not been an updated and comprehensive literature review on the uses of fuzzy logic in the financial field. For that reason, this study attempts to critically examine fuzzy logic as an effective, useful method to be applied to financial research and, particularly, to the management of banking crises. The data sources were Web of Science and Scopus, followed by an assessment of the records according to pre-established criteria and an arrangement of the information in two main axes: financial markets and corporate finance. A major finding of this analysis is that fuzzy logic has not yet been used to address banking crises or as an alternative to ensure the resolvability of banks while minimizing the impact on the real economy. Therefore, we consider this article relevant for supervisory and regulatory bodies, as well as for banks and academic researchers, since it opens the door to several new research axes on banking crisis analyses using artificial intelligence techniques

Ennustemallin kehittäminen suomalaisten PK-yritysten konkurssiriskin määritykseen

Bankruptcy prediction is a subject of significant interest to both academics and practitioners because of its vast economic and societal impact. Academic research in the field is extensive and diverse; no consensus has formed regarding the superiority of different prediction methods or predictor variables. Most studies focus on large companies; small and medium-sized enterprises (SMEs) have received less attention, mainly due to data unavailability. Despite recent academic advances, simple statistical models are still favored in practical use, largely due to their understandability and interpretability. This study aims to construct a high-performing but user-friendly and interpretable bankruptcy prediction model for Finnish SMEs using financial statement data from 2008–2010. A literature review is conducted to explore the key aspects of bankruptcy prediction; the findings are used for designing an empirical study. Five prediction models are trained on different predictor subsets and training samples, and two models are chosen for detailed examination based on the findings. A prediction model using the random forest method, utilizing all available predictors and the unadjusted training data containing an imbalance of bankrupt and non-bankrupt firms, is found to perform best. Superior performance compared to a benchmark model is observed in terms of both key metrics, and the random forest model is deemed easy to use and interpretable; it is therefore recommended for practical application. Equity ratio and financial expenses to total assets consistently rank as the best two predictors for different models; otherwise the findings on predictor importance are mixed, but mainly in line with the prevalent views in the related literature. This study shows that constructing an accurate but practical bankruptcy prediction model is feasible, and serves as a guideline for future scholars and practitioners seeking to achieve the same. Some further research avenues to follow are recognized based on empirical findings and the extant literature. In particular, this study raises an important question regarding the appropriateness of the most commonly used performance metrics in bankruptcy prediction. Area under the precision-recall curve (PR AUC), which is widely used in other fields of study, is deemed a suitable alternative and is recommended for measuring model performance in future bankruptcy prediction studies.Konkurssien ennustaminen on taloudellisten ja yhteiskunnallisten vaikutustensa vuoksi merkittävä aihe akateemisesta ja käytännöllisestä näkökulmasta. Alan tutkimus on laajaa ja monipuolista, eikä konsensusta parhaiden ennustemallien ja -muuttujien suhteen ole saavutettu. Valtaosa tutkimuksista keskittyy suuryrityksiin; pienten ja keskisuurten (PK)-yritysten konkurssimallinnus on jäänyt vähemmälle huomiolle. Akateemisen tutkimuksen viimeaikaisesta kehityksestä huolimatta käytännön sovellukset perustuvat usein yksinkertaisille tilastollisille malleille johtuen niiden paremmasta ymmärrettävyydestä. Tässä diplomityössä rakennetaan ennustemalli suomalaisten PK-yritysten konkurssiriskin määritykseen käyttäen tilinpäätösdataa vuosilta 2008–2010. Tavoitteena on tarkka, mutta käyttäjäystävällinen ja helposti tulkittava malli. Konkurssimallinnuksen keskeisiin osa-alueisiin perehdytään kirjallisuuskatsauksessa, jonka pohjalta suunnitellaan empiirinen tutkimus. Viiden mallinnusmenetelmän suoriutumista vertaillaan erilaisia opetusaineiston ja ennustemuuttujien osajoukkoja käyttäen, ja löydösten perusteella kaksi parasta menetelmää otetaan lähempään tarkasteluun. Satunnaismetsä (random forest) -koneoppimismenetelmää käyttävä, kaikkia saatavilla olevia ennustemuuttujia ja muokkaamatonta, epäsuhtaisesti konkurssi- ja ei-konkurssitapauksia sisältävää opetusaineistoa hyödyntävä malli toimii parhaiten. Keskeisten suorituskykymittarien valossa satunnaismetsämalli suoriutuu käytettyä verrokkia paremmin, ja todetaan helppokäyttöiseksi ja hyvin tulkittavaksi; sitä suositellaan sovellettavaksi käytäntöön. Omavaraisuusaste ja rahoituskulujen suhde taseen loppusummaan osoittautuvat johdonmukaisesti parhaiksi ennustemuuttujiksi eri mallinnusmetodeilla, mutta muilta osin havainnot muuttujien keskinäisestä paremmuudesta ovat vaihtelevia. Tämä diplomityö osoittaa, että konkurssiennustemalli voi olla sekä tarkka että käytännöllinen, ja tarjoaa suuntaviivoja tuleville tutkimuksille. Empiiristen havaintojen ja kirjallisuuslöydösten pohjalta esitetään jatkotutkimusehdotuksia. Erityisen tärkeä huomio on se, että konkurssiennustamisessa tyypillisesti käytettyjen suorituskykymittarien soveltuvuus on kyseenalaista konkurssitapausten harvinaisuudesta johtuen. Muilla tutkimusaloilla laajasti käytetty tarkkuus-saantikäyrän alle jäävä pinta-ala (PR AUC) todetaan soveliaaksi vaihtoehdoksi, ja sitä suositellaan käytettäväksi konkurssimallien suorituskyvyn mittaukseen. Avainsanat konkurssien ennustaminen, luottoriski, koneoppiminen

Predicting business failure using artificial intelligence system

This thesis was submitted for the award of Doctor of Philosophy and was awarded by Brunel University LondonPredicting business insolvency is considered one of the main supportive sources of information for decision making for financial institutions, investors, creditors, and other participants in the business market. Financial reporting systems provide relevant information that can be used to assess the financial position of firms. It is crucial to have classification and prediction models that can analyse this financial information and provide accurate assurance for users about business health. Recent studies have explored the use of machine learning tools as substitute for traditional statistical methods to develop classification models to classify firm insolvency according to financial statement information. However, these models have no ideal classifier, since each provides a certain percentage of wrong outputs, which is a crucial consideration; every percentage of wrong response can mean massive financial losses for stakeholders. Therefore, this study proposes new insolvency classification and perdition models based on machine learning modelling techniques to develop an improved classifier. Individual modelling techniques using statistical methods and machine learning were used to develop the classification model of business insolvency. The results showed that machine learning method outperformed statistical methods. Deep Learning (DPL) achieved the highest performance based on all performance measurements used in the study, and it was the best individual classifier, with average accuracy of 97.2% using all-years dataset. Ensemble- Boosted Decision Tree classifier ranked second, followed by Decision Tree classifier. Thus, it has been proven that DPL modelling approach is useful for business insolvency classification. A key contribution in enhancing individual classifier outputs is the use of traditional combining methods with two new aggregation methods in business insolvency (Fuzzy Logic and Consensus Approach). The Consensus Approach showed the best improvement in the results of all individual classifiers with average accuracy of 97.7%, and it is considered the best classification method not only in comparison with individual classifiers, but also with traditional combiners. This study pioneers the development of a time series business insolvency prediction model with Big Data for UK businesses. The aim of the model is to provide early prediction about a business health. Three prediction models were developed based on Nonlinear Autoregressive with Exogenous Input models (NARX), Nonlinear Autoregressive Neural Network (NAR), and Deep Learning Time-series model (DPL-SA) and achieved average accuracy rates of 83.6%, 89.5%, and 91.35%, respectively. The results show relatively high performance in comparison with the best individual classifier (deep learning)

An academic review: applications of data mining techniques in finance industry

With the development of Internet techniques, data volumes are doubling every two years, faster than predicted by Moore’s Law. Big Data Analytics becomes particularly important for enterprise business. Modern computational technologies will provide effective tools to help understand hugely accumulated data and leverage this information to get insights into the finance industry. In order to get actionable insights into the business, data has become most valuable asset of financial organisations, as there are no physical products in finance industry to manufacture. This is where data mining techniques come to their rescue by allowing access to the right information at the right time. These techniques are used by the finance industry in various areas such as fraud detection, intelligent forecasting, credit rating, loan management, customer profiling, money laundering, marketing and prediction of price movements to name a few. This work aims to survey the research on data mining techniques applied to the finance industry from 2010 to 2015.The review finds that Stock prediction and Credit rating have received most attention of researchers, compared to Loan prediction, Money Laundering and Time Series prediction. Due to the dynamics, uncertainty and variety of data, nonlinear mapping techniques have been deeply studied than linear techniques. Also it has been proved that hybrid methods are more accurate in prediction, closely followed by Neural Network technique. This survey could provide a clue of applications of data mining techniques for finance industry, and a summary of methodologies for researchers in this area. Especially, it could provide a good vision of Data Mining Techniques in computational finance for beginners who want to work in the field of computational finance