Financial Distress Prediction and Feature Selection in Multiple Periods by Lassoing Unconstrained Distributed Lag Non-linear Models

Dawen Yan, Guotai Chi and Kin Keung Lai
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Dawen Yan: School of Mathematical Sciences, Dalian University of Technology, Dalian 116024, China
Guotai Chi: School of Economics and Management, Dalian University of Technology, Dalian 116024, China
Kin Keung Lai: College of Economics, Shenzhen University, Shenzhen 518060, China

Mathematics, 2020, vol. 8, issue 8, 1-27

Abstract: In this paper, we propose a new framework of a financial early warning system through combining the unconstrained distributed lag model (DLM) and widely used financial distress prediction models such as the logistic model and the support vector machine (SVM) for the purpose of improving the performance of an early warning system for listed companies in China. We introduce simultaneously the 3~5-period-lagged financial ratios and macroeconomic factors in the consecutive time windows t − 3, t − 4 and t − 5 to the prediction models; thus, the influence of the early continued changes within and outside the company on its financial condition is detected. Further, by introducing lasso penalty into the logistic-distributed lag and SVM-distributed lag frameworks, we implement feature selection and exclude the potentially redundant factors, considering that an original long list of accounting ratios is used in the financial distress prediction context. We conduct a series of comparison analyses to test the predicting performance of the models proposed by this study. The results show that our models outperform logistic, SVM, decision tree and neural network (NN) models in a single time window, which implies that the models incorporating indicator data in multiple time windows convey more information in terms of financial distress prediction when compared with the existing singe time window models.

Keywords: financial distress prediction; unconstrained distributed lag model; multiple periods; Chinese listed companies (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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