Comparison of Parametric, Semi-Parametric and Non-Parametric Methods in Bankruptcy Prediction

24 Pages Posted: 2 Mar 2007  

Arjana Brezigar Masten

Institute for Macroeconomic Analysis and Development

Igor Masten

University of Ljubljana - Faculty of Economics

Date Written: March 1, 2007

Abstract

This paper compares parametric, semi-parametric and non-parametric methods in prediction of bankruptcy. Special care is devoted to the effect of choice-based sampling. The choice of the sampling and estimation method lead to a similar trade off. Using choice-based sampling and logit model leads to minimization of risk exposure. Samples unbalanced across groups and Klein and Spady (1993) semi-parametric method allow for better overall prediction accuracy and thus profit maximization. Both the choice of sampling method and the choice of estimation method should be thus made conditional on an explicit objective function of the financial institution in assesing credit risk.

Keywords: bankruptcy prediction, semi-parametric methods, CART

JEL Classification: G32, G33, C14, C25

Suggested Citation

Brezigar Masten, Arjana and Masten, Igor, Comparison of Parametric, Semi-Parametric and Non-Parametric Methods in Bankruptcy Prediction (March 1, 2007). Available at SSRN: https://ssrn.com/abstract=967637 or http://dx.doi.org/10.2139/ssrn.967637

Arjana Brezigar Masten (Contact Author)

Institute for Macroeconomic Analysis and Development ( email )

Gregorciceva 27
Ljubljana
Slovenia

Igor Masten

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Paper statistics

Downloads
394
Rank
59,822
Abstract Views
1,923