16 / 2017-12-27 21:27:24

Bankruptcy Prediction for Credit Risk Using Neural Networks

Asset-based model, bankruptcy prediction, corporate distress, corporate failure prediction, credit risk, default prediction, financial ratios, financial statement data, multilayer networks.

The prediction of corporate bankruptcies is an
important and widely studied topic since it can have significant impact on bank lending decisions and profitability. This
work presents two contributions. First we review the topic of
bankruptcy prediction, with emphasis on neural-network (NN)
models. Second, we develop an NN bankruptcy prediction model.
Inspired by one of the traditional credit risk models developed
by Merton, we propose novel indicators for the NN system. We
show that the use of these indicators in addition to traditional
financial ratio indicators provides a significant improvement in
the (out-of-sample) prediction accuracy (from 81.46% to 85.5%
for a three-year-ahead forecast).