Imbalance-oriented SVM methods for financial distress prediction: a comparative study among the new SB-SVM-ensemble method and traditional methods

Jie Sun, Zhiming Shang and Hui Li
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Jie Sun: Zhejiang Normal University, Zhejiang, China
Zhiming Shang: Zhejiang Normal University, Zhejiang, China
Hui Li: Zhejiang Normal University, Zhejiang, China

Journal of the Operational Research Society, 2014, vol. 65, issue 12, 1905-1919

Abstract: Previous studies on financial distress prediction (FDP) almost construct FDP models based on a balanced data set, or only use traditional classification methods for FDP modelling based on an imbalanced data set, which often results in an overestimation of an FDP model’s recognition ability for distressed companies. Our study focuses on support vector machine (SVM) methods for FDP based on imbalanced data sets. We propose a new imbalance-oriented SVM method that combines the synthetic minority over-sampling technique (SMOTE) with the Bagging ensemble learning algorithm and uses SVM as the base classifier. It is named as SMOTE-Bagging-based SVM-ensemble (SB-SVM-ensemble), which is theoretically more effective for FDP modelling based on imbalanced data sets with limited number of samples. For comparative study, the traditional SVM method as well as three classical imbalance-oriented SVM methods such as cost-sensitive SVM, SMOTE-SVM, and data-set-partition-based SVM-ensemble are also introduced. We collect an imbalanced data set for FDP from the Chinese publicly traded companies, and carry out 100 experiments to empirically test its effectiveness. The experimental results indicate that the new SB-SVM-ensemble method outperforms the traditional methods and is a useful tool for imbalanced FDP modelling.

Date: 2014
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