An evolution-based approach with modularized evaluations to forecast financial distress

Due to the radical changing of the global economy, a more precise forecasting of corporate financial distress helps provide important judgment principles to decision-makers. Although financial statements reflect a firm's business activities, it is very challenging to discover critical information from these statements. Applying machine learning algorithms can be demonstrated to improve forecasting accuracy in predicting corporate bankruptcy. In this paper, we introduce an evolutionary approach with modularized evaluation functions to forecast financial distress, which allows using any evolutionary algorithm to extract the set of critical financial ratios and integrates more evaluation function modules to achieve a better forecasting accuracy by assigning distinct weights. To achieve a more precise predicting accuracy, the undesirable forecasting results from some modules are weeded out, if their predicting accuracies are out of the allowable tolerance range as learned from our mechanism.     

基于新闻文本的上市公司财务困境组合预测模型

已有上市公司财务困境预测模型主要是基于结构化数据进行研究,为进一步提高上市公司财务困境预测模型准确率,本文将非结构化数据引入上市公司财务困境预测问题中,研究了基于新闻文本分类的上市公司财务困境预测模型,结合新闻文本信息和财务信息提出上市公司财务困境组合预测模型。本文首先将新闻数据进行预处理,然后基于新闻文本数据通过支持向量机（SVM）进行财务困境预测,同时基于财务数据通过Logistic模型进行财务困境预测,最后采用阈值表决集成策略整合两种模型的预测结果,实验结果证明了模型的有效性。     

Data depth based support vector machines for predicting corporate bankruptcy

In financial distress analysis, the diagnosis of firms at risk for bankruptcy is crucial in preparing to hedge against any financial damage the at-risk firms stand to inflict. Some pre-alarm signals that indicate a potential financial crisis exist when a firm faces a default risk. Early studies on corporate bankruptcy prediction include parametric and nonparametric approaches, such as artificial intelligence (AI), for detecting pre-alarm signals. Among nonparametric techniques, the methods involving support vector machine (SVM) have shown potential in predicting corporate bankruptcy. We propose a hybrid method that combines data depths and nonlinear SVM for the prediction of corporate bankruptcy. We employed data depth functions to condense multivariate financial data with nonlinear and non-normal characteristics into one-dimensional space. The SVM method was introduced to classify the data points on a depth versus depth plot (DD-plot). Based on data set that records failed and non-failed manufacturing firms in Korea over 10 years, the empirical results demonstrated that the proposed method offers a higher level of accuracy in corporate bankruptcy prediction than existing methods. The proposed method is expected to provide a guidance in corporate investing for investors or other interested parties.     

Predicting corporate financial distress based on integration of decision tree classification and logistic regression

Lately, stock and derivative securities markets continuously and rapidly evolve in the world. As quick market developments, enterprise operating status will be disclosed periodically on financial statement. Unfortunately, if executives of firms intentionally dress financial statements up, it will not be observed any financial distress possibility in the short or long run. Recently, there were occurred many financial crises in the international marketing, such as Enron, Kmart, Global Crossing, WorldCom and Lehman Brothers events. How these financial events affect world’s business, especially for the financial service industry or investors has been public’s concern. To improve the accuracy of the financial distress prediction model, this paper referred to the operating rules of the Taiwan Stock Exchange Corporation (TSEC) and collected 100 listed companies as the initial samples. Moreover, the empirical experiment with a total of 37 ratios which composed of financial and other non-financial ratios and used principle component analysis (PCA) to extract suitable variables. The decision tree (DT) classification methods (C5.0, CART, and CHAID) and logistic regression (LR) techniques were used to implement the financial distress prediction model. Finally, the experiments acquired a satisfying result, which testifies for the possibility and validity of our proposed methods for the financial distress prediction of listed companies.This paper makes four critical contributions: (1) the more PCA we used, the less accuracy we obtained by the DT classification approach. However, the LR approach has no significant impact with PCA; (2) the closer we get to the actual occurrence of financial distress, the higher the accuracy we obtain in DT classification approach, with an 97.01% correct percentage for 2 seasons prior to the occurrence of financial distress; (3) our empirical results show that PCA increases the error of classifying companies that are in a financial crisis as normal companies; and (4) the DT classification approach obtains better prediction accuracy than the LR approach in short run (less one year). On the contrary, the LR approach gets better prediction accuracy in long run (above one and half year). Therefore, this paper proposes that the artificial intelligent (AI) approach could be a more suitable methodology than traditional statistics for predicting the potential financial distress of a company in short run.     

财务困境预测模型与仿真研究

公司财务困境受到决策者、市场、经济和政策多种因素影响,针对传统预测方法预测精度低缺陷,提出了一种贝叶斯判别分析的财务困境预测方法。首先选用了反映公司财务状况的24个指标作判别因子,建立了公司财务困境的贝叶斯判别分析模型,然后采用85个上市公司的实际数据作为学习样本建立贝叶斯判别函数,以交差确认估计法对判别准则进行评价,以验证模型的有效性,最后利用判别函数对5个待评价公司进行预测,得到判别函数值,进行仿真。结果表明,采用贝叶斯判别分析模型提高了公司财务困境的预测精度,是一种有效的财务困境预测方法。     

Enhancing decisions with life cycle analysis for risk management

Although corporate financial distress is an infrequent occurrence, it has an extremely debilitating effect on the stability of a firm when it does occur. For this reason, an accurate risk assessment mechanism is needed in numerous industry sectors, particularly in financial institutions and banking. Based on corporation life cycle theory and risk management, this study develops a risk pre-warning model, namely the RSVMDT model, to eliminate serious financial punching and to examine the effectiveness of transparency and the full disclosure index (TFDI) during each life cycle stage. The RSVMDT model includes three techniques: random forest (RF), support vector machines (SVMs), and decision trees (DTs). The RF is used to determine the essential attributes of firms and therefore decrease the computational complexity of financial analysis and improve the classification accuracy. The SVM is employed as a classifier to identify corporations in financial distress. Finally, the DT is utilized as a rule generator that allows decision makers to adjust the financial structures of firms at specific life cycle stages. Together, these three techniques can increase the probability of corporate survival in a highly competitive environment. Additionally, the study further evaluates the importance of the TFDI during a turbulent economy. The public sectors can benefit from this evaluation by formulating future policies based on the rules derived from the developed RSVMDT model.     

基于人工神经网络进行财务危机预警的改进方法

利用Ruck的研究成果,对人工神经网络进行财务危机预警的方法进行了改进,输出公司未来的财务状况是正常还是陷入危机的概率.利用我国上市公司1998年到2003年的财务数据,实验证明改进方法能够有效预测公司财务状况,提前2年判断公司是否会陷入财务危机的正确率达到82%.     

A cross model study of corporate financial distress prediction in Taiwan: Multiple discriminant analysis, logit, probit and neural networks models

In 2008, financial tsunami started to impair the economic development of many countries, including Taiwan. The prediction of financial crisis turns to be much more important and doubtlessly holds public attention when the world economy goes to depression. This study examined the predictive ability of the four most commonly used financial distress prediction models and thus constructed reliable failure prediction models for public industrial firms in Taiwan. Multiple discriminate analysis (MDA), logit, probit, and artificial neural networks (ANNs) methodology were employed to a dataset of matched sample of failed and non-failed Taiwan public industrial firms during 1998–2005. The final models are validated using within sample test and out-of-the-sample test, respectively. The results indicated that the probit, logit, and ANN models which used in this study achieve higher prediction accuracy and possess the ability of generalization. The probit model possesses the best and stable performance. However, if the data does not satisfy the assumptions of the statistical approach, then the ANN approach would demonstrate its advantage and achieve higher prediction accuracy. In addition, the models which used in this study achieve higher prediction accuracy and possess the ability of generalization than those of [Altman, Financial ratios—discriminant analysis and the prediction of corporate bankruptcy using capital market data, Journal of Finance 23 (4) (1968) 589–609, Ohlson, Financial ratios and the probability prediction of bankruptcy, Journal of Accounting Research 18 (1) (1980) 109–131, and Zmijewski, Methodological issues related to the estimation of financial distress prediction models, Journal of Accounting Research 22 (1984) 59–82]. In summary, the models used in this study can be used to assist investors, creditors, managers, auditors, and regulatory agencies in Taiwan to predict the probability of business failure.     

基于模糊修正的金融预测

文章研究了模糊逻辑模型在金融预测领域中的应用。由于该模型自身的局限性,在对金融时间序列趋势的连续预测应用中,趋势准确率偏低,连续预测值波动小(体现不出未来的市场走向),对此,提出了模糊修正的方法。文章运用模糊修正模型对上证综合指数和道琼斯平均工业指数做试验,并与BP神经网络进行比较,试验结果表明,运用模糊修正模型进行金融预测是可行的和有效的。     

An improved boosting based on feature selection for corporate bankruptcy prediction

With the recent financial crisis and European debt crisis, corporate bankruptcy prediction has become an increasingly important issue for financial institutions. Many statistical and intelligent methods have been proposed, however, there is no overall best method has been used in predicting corporate bankruptcy. Recent studies suggest ensemble learning methods may have potential applicability in corporate bankruptcy prediction. In this paper, a new and improved Boosting, FS-Boosting, is proposed to predict corporate bankruptcy. Through injecting feature selection strategy into Boosting, FS-Booting can get better performance as base learners in FS-Boosting could get more accuracy and diversity. For the testing and illustration purposes, two real world bankruptcy datasets were selected to demonstrate the effectiveness and feasibility of FS-Boosting. Experimental results reveal that FS-Boosting could be used as an alternative method for the corporate bankruptcy prediction.     

Ensemble boosted trees with synthetic features generation in application to bankruptcy prediction

Bankruptcy prediction has been a subject of interests for almost a century and it still ranks high among hottest topics in economics. The aim of predicting financial distress is to develop a predictive model that combines various econometric measures and allows to foresee a financial condition of a firm. In this domain various methods were proposed that were based on statistical hypothesis testing, statistical modeling (e.g., generalized linear models), and recently artificial intelligence (e.g., neural networks, Support Vector Machines, decision tress). In this paper, we propose a novel approach for bankruptcy prediction that utilizes Extreme Gradient Boosting for learning an ensemble of decision trees. Additionally, in order to reflect higher-order statistics in data and impose a prior knowledge about data representation, we introduce a new concept that we refer as to synthetic features. A synthetic feature is a combination of the econometric measures using arithmetic operations (addition, subtraction, multiplication, division). Each synthetic feature can be seen as a single regression model that is developed in an evolutionary manner. We evaluate our solution using the collected data about Polish companies in five tasks corresponding to the bankruptcy prediction in the 1st, 2nd, 3rd, 4th, and 5th year. We compare our approach with the reference methods.     

Listed companies’ financial distress prediction based on weighted majority voting combination of multiple classifiers

How to effectively predict financial distress is an important problem in corporate financial management. Though much attention has been paid to financial distress prediction methods based on single classifier, its limitation of uncertainty and benefit of multiple classifier combination for financial distress prediction has also been neglected. This paper puts forward a financial distress prediction method based on weighted majority voting combination of multiple classifiers. The framework of multiple classifier combination system, model of weighted majority voting combination, basic classifiers’ voting weight model and basic classifiers’ selection principles are discussed in detail. Empirical experiment with Chinese listed companies’ real world data indicates that this method can greatly improve the average prediction accuracy and stability, and it is more suitable for financial distress prediction than single classifiers.     

基于数据包络和数据挖掘的财务危机预测模型研究

以往的企业财务危机预测研究只能预测企业是否具有财务危机,无法预测企业财务危机的程度,这是由于在界定企业财务危机时,只依据了企业是否为ST企业的分类方式。鉴于此,通过数据包络分析法,近一步细化了企业财务危机的分类,再使用关联规则算法筛选出重要的预测变量,最后使用决策树技术构建企业财务危机预测模型,并对分类的有效性和预测的准确率进行了验证。实证结果表明,基于数据包络和数据挖掘的财务危机预测模型既能保持较高的准确率,又能预测企业财务危机的程度,使得预测结果更具有参考价值。     

Using partial least squares and support vector machines for bankruptcy prediction

The evaluation of corporate financial distress has attracted significant global attention as a result of the increasing number of worldwide corporate failures. There is an immediate and compelling need for more effective financial distress prediction models. This paper presents a novel method to predict bankruptcy. The proposed method combines the partial least squares (PLS) based feature selection with support vector machine (SVM) for information fusion. PLS can successfully identify the complex nonlinearity and correlations among the financial indicators. The experimental results demonstrate its superior predictive ability. On the one hand, the proposed model can select the most relevant financial indicators to predict bankruptcy and at the same time identify the role of each variable in the prediction process. On the other hand, the proposed model’s high levels of prediction accuracy can translate into benefits to financial organizations through such activities as credit approval, and loan portfolio and security management.     

Prediction of daily maximum ozone threshold exceedances by preprocessing and ensemble artificial intelligence techniques: Case study of Hong Kong

The objective of this study was to apply preprocessing and ensemble artificial intelligence classifiers to forecast daily maximum ozone threshold exceedances in the Hong Kong area. Preprocessing methods, including over-sampling, under-sampling, and the synthetic minority over-sampling technique, were employed to address the imbalance data problem. Ensemble algorithms are proposed to improve the classifier's accuracy. Moreover, a distance-based regional data set was generated to capture ozone transportation characteristics. The results show that a combination of preprocessing methods and ensemble algorithms can effectively forecast ozone threshold exceedances. Furthermore, this study advises on the relative importance of the different variables for ozone pollution prediction and confirms that regional data facilitate better forecasting. The results of this research can be promoted by the Hong Kong authorities for improving the existing forecasting tools. Moreover, the results can facilitate researchers' selection of the appropriate techniques in their future research.     

灰色变异粒子群算法在电力负荷预测中的应用

由于电力负荷量是电力系统发展的基础,因此提高电力负荷量预测的准确性有利于电力系统的快速发展. 本文利用粒子群算法优化参数的良好性能和灰色预测法适合预测不确定因素影响系统的优势,提出了灰色变异粒子群组合预测模型来预测电力负荷量,提高了电力负荷预测的精度,并通过实例对组合预测模型的预测精度和有效性进行了分析. 结果表明,此组合预测模型的精度优于单一的灰色预测模型,且优于其他几种预测算法,该组合模型能很好地预测电力负荷量,为电力系统的决策和发展提供了可靠的科学数据.     

A comparison of neural networks and adaptive neuro-fuzzy inference systems for the prediction of water diffusion through carbon nanotubes

Given the fact that artificial intelligence tools such as neural network and fuzzy logic are capable of learning and inferencing from the past to capture the patterns that exist in the data, this study presents an intelligent method for the forecasting of water diffusion through carbon nanotubes where predictions are generated from neuro-fuzzy structures using molecular dynamics data. Therefore, this research was mainly focused on combining molecular dynamics with artificial intelligence methods in order to reduce the computational time of biomolecular and nanofluidic simulations. Two different artificial intelligence methods are applied for the time-dependent water diffusion forecasting: artificial neural network (ANN) and adaptive neuro-fuzzy inference systems (ANFISs). The effects of different sizes of training sample sets on forecasting performance of ANN and ANFIS are investigated as well. Four different evaluation methods are used to measure the performance and forecasting accuracy of these two methods. As a result, ANFIS presents the higher accuracy than neural network method based on the comparison of these different evaluation methods adopted in this research. The results reported in this research demonstrate that combining of molecular dynamics with artificial intelligence methods can be one of the most powerful and beneficial tools for prediction of important nanofluidic parameters.     

Impact of momentum bias on forecasting through knowledge discovery techniques in the foreign exchange market

To an increasing extent since the late 1980s, software learning methods including neural networks (NN) and case based reasoning (CBR) have been used for prediction in financial markets and other areas. In the past, the prediction of foreign exchange rates has focused on isolated techniques, as exemplified by the use of time series models including regression models or smoothing methods to identify cycles and trends. At best, however, the use of isolated methods can only represent fragmented models of the causative agents, which underlie business cycles. Experience with artificial intelligence applications since the early 1980s points toward a multistrategy approach to discovery and prediction.This paper investigates the impact of momentum bias on forecasting financial markets through knowledge discovery techniques. Different modes of bias are used as input into learning systems using implicit knowledge representation (NNs) and CBR. The concepts are examined in the context of predicting movements in the Japanese yen.     

Bankruptcy prediction modeling with hybrid case-based reasoning and genetic algorithms approach

One of the most important research issues in finance is building effective corporate bankruptcy prediction models because they are essential for the risk management of financial institutions. Researchers have applied various data-driven approaches to enhance prediction performance including statistical and artificial intelligence techniques, and many of them have been proved to be useful. Case-based reasoning (CBR) is one of the most popular data-driven approaches because it is easy to apply, has no possibility of overfitting, and provides good explanation for the output. However, it has a critical limitation—its prediction performance is generally low. In this study, we propose a novel approach to enhance the prediction performance of CBR for the prediction of corporate bankruptcies. Our suggestion is the simultaneous optimization of feature weighting and the instance selection for CBR by using genetic algorithms (GAs). Our model can improve the prediction performance by referencing more relevant cases and eliminating noises. We apply our model to a real-world case. Experimental results show that the prediction accuracy of conventional CBR may be improved significantly by using our model. Our study suggests ways for financial institutions to build a bankruptcy prediction model which produces accurate results as well as good explanations for these results.