A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime
arXiv:1502.00882 · doi:10.1007/s10614-014-9452-9
Abstract
Credit estimation and bankruptcy prediction methods have been utilizing Altman's score method for the last several years. It is reported in many studies that score is sensitive to changes in accounting figures. Researches have proposed different variations to conventional score that can improve the prediction accuracy. In this paper we develop a new multivariate non-linear model for computing the score. In addition we develop a new credit risk index by fitting a Pearson type-III distribution to the transformed financial ratios. The results from our study have shown that the new score can predict the bankruptcy with an accuracy of as compared to by the Altman's score. Also, the discriminate analysis revealed that the new transformed financial ratios could predict the bankruptcy probability with an accuracy of as compared to using the weights of Altman's score.
14 pages, 1 figure in Computational Economics, 2014