Forecasting bank failures and stress testing: A machine learning approach
Periklis Gogas (),
Theophilos Papadimitriou () and
International Journal of Forecasting, 2018, vol. 34, issue 3, 440-455
This paper presents a forecasting model of bank failures based on machine-learning. The proposed methodology defines a linear decision boundary that separates the solvent banks from those that failed. This setup generates a novel alternative stress-testing tool. Our sample of 1443 U.S. banks includes all 481 banks that failed during the period 2007–2013. The set of explanatory variables is selected using a two-step feature selection procedure. The selected variables were then fed to a support vector machines forecasting model, through a training–testing learning process. The model exhibits a 99.22% overall forecasting accuracy and outperforms the well-established Ohlson’s score.
Keywords: Machine learning; Bank failures; Stress testing; Forecasting (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:34:y:2018:i:3:p:440-455
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