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Predicting US Banks Bankruptcy: Logit Versus Canonical Discriminant Analysis

Zeineb Affes () and Rania Hentati-Kaffel ()
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Zeineb Affes: Université Paris1 Panthéon-Sorbonne
Rania Hentati-Kaffel: Université Paris1 Panthéon-Sorbonne

Computational Economics, 2019, vol. 54, issue 1, 199-244

Abstract: Abstract In this paper, we use random subspace method to compare the classification and prediction of both canonical discriminant analysis and logistic regression models with and without misclassification costs. They have been applied to a large panel of US banks over the period 2008–2013. Results show that model’s accuracy have improved in case of more appropriate cut-off value $$C^*_{ROC}$$ C R O C ∗ that maximizes the overall correct classification rate under the ROC curve. We also have tested the newly H-measure of classification performance and provided results for different parameters of misclassification costs. Our main conclusions are: (1) The logit model outperforms the CDA one in terms of correct classification rate by using usual cut-off parameters, (2) $$C^*_{ROC}$$ C R O C ∗ improves the accuracy of classification in both CDA and logit regression, (3) H-measure and ROC curve validation improve the quality of the model by minimizing the error of misclassification of bankrupt banks. Moreover, it emphasizes better prediction of banks failure because it delivers in average the highest error type II.

Keywords: Bankruptcy prediction; Early-warning system; Canonical discriminant analysis; Logistic regression; Principal component analysis; CAMELS; ROC curve; H-measure; Cost of misclassification (search for similar items in EconPapers)
Date: 2019
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