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Predicting US Banks Bankruptcy: Logit Versus Canonical Discriminant Analysis

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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 \(C^*_{ROC}\) 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) \(C^*_{ROC}\) 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.

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Notes

  1. The specificity represents the number of the actives banks classified in the group of the actives banks.

  2. The sensitivity represents the percentage of the bankrupt banks correctly classified.

  3. The correct classification rate corresponds to the number of all the banks correctly classified.

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Authors and Affiliations

  1. Centre d’Economie de la Sorbonne, Maison des Sciences Economiques, Université Paris1 Panthéon-Sorbonne, 106-112 Boulevard de l’Hôpital, 75013, Paris, France

    Zeineb Affes & Rania Hentati-Kaffel

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  1. Zeineb Affes
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  2. Rania Hentati-Kaffel
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Correspondence to Rania Hentati-Kaffel.

Additional information

This work was achieved through the Laboratory of Excellence on Financial Regulation (Labex ReFi) supported by PRES heSam under the reference ANR-10-LABX-0095.

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Affes, Z., Hentati-Kaffel, R. Predicting US Banks Bankruptcy: Logit Versus Canonical Discriminant Analysis. Comput Econ 54, 199–244 (2019). https://doi.org/10.1007/s10614-017-9698-0

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