A semiparametric method for predicting bankruptcy

Ruey-Ching Hwang, K. F. Cheng and Jack C. Lee
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Jack C. Lee: Graduate Institute of Finance, National Chiao Tung University, Hsinchu, Taiwan, Postal: Graduate Institute of Finance, National Chiao Tung University, Hsinchu, Taiwan

Journal of Forecasting, 2007, vol. 26, issue 5, pages 317-342

Abstract: Bankruptcy prediction methods based on a semiparametric logit model are proposed for simple random (prospective) and case-control (choice-based; retrospective) data. The unknown parameters and prediction probabilities in the model are estimated by the local likelihood approach, and the resulting estimators are analyzed through their asymptotic biases and variances. The semiparametric bankruptcy prediction methods using these two types of data are shown to be essentially equivalent. Thus our proposed prediction model can be directly applied to data sampled from the two important designs. One real data example and simulations confirm that our prediction method is more powerful than alternatives, in the sense of yielding smaller out-of-sample error rates. Copyright © 2007 John Wiley & Sons, Ltd.

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