A quarterly time-series classifier based on a reduced-dimension generated rules method for identifying financial distress

Ching-Hsue Cheng and Ssu-Hsiang Wang

Quantitative Finance, 2015, vol. 15, issue 12, 1979-1994

Abstract: Predicting financial distress has been and will remain an important and challenging issue. Many methods have been proposed to predict bankruptcies and detect financial crises, including conventional approaches and techniques involving artificial intelligence (AI). Financial distress information influences investor decisions, and investors depend on analysts' opinions and subjective judgements in assessing such information, which sometimes results in investors making mistakes. In the light of the foregoing, this paper proposes a novel quarterly time series classifier, which reduces the sheer volume of high-dimensional data to be analysed and provides decision-makers with rules that can be used as a reference in assessing the financial situation of a company. This study employs the following six attribute selection methods to reduce the high-dimensional data: (1) the chi-square test, (2) information gain, (3) discriminant analysis, (4) logistic regression (LR) analysis, (5) support vector machine (SVM) and (6) the proposed Join method. After selecting attributes, this study utilises the rough set classifier to generate the rules of financial distress. To verify the proposed method, an empirically collected financial distress data-set is employed as the experimental sample and is compared with the decision tree, multilayer perceptron and SVM under Type I error, Type II error and accuracy criteria. Because financial distress data are quarterly time series data, this study conducts non-time series and time series (moving windows) experiments. The experimental results indicate that the LR and chi-square attribute selection combined with the rough set classifier outperform the listing methods under Type I, Type II error and accuracy criteria.

Date: 2015
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DOI: 10.1080/14697688.2015.1008029

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