Forecast bankruptcy using a blend of clustering and MARS model: case of US banks

S.I.: Risk in Financial Economics
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Abstract

In this paper, we compare the performance of two non-parametric methods of classification and regression trees (CART) and the newly multivariate adaptive regression splines (MARS) models, in forecasting bankruptcy. Models are tested on a large universe of US banks over a complete market cycle and run under a K-fold cross validation. Then, a hybrid model which combines K-means clustering and MARS is tested as well. Our findings highlight that (i) Either in training or testing sample, MARS provides, in average, better correct classification rate than CART model (ii) Hybrid approach significantly increases the classification accuracy rate in the training sample (iii) MARS prediction underperforms when the misclassification of the bankrupt banks rate is adopted as a criteria (iv) Finally, results prove that non-parametric models are more suitable for bank failure prediction than the corresponding Logit model.

Keywords

Bankruptcy prediction MARS CART K-means Early-warning system 

JEL Classification

C14 C25 C38 C53 G17 G21 G28 G33 

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Centre d’Economie de la SorbonneUniversité Paris1 Panthéon-Sorbonne, Maison des Sciences EconomiquesParisFrance

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