Econometrics

Computer science

Bankruptcy prediction

Finance

Mathematics

Financial modeling

Point (geometry)

Time horizon

Horizon

Bankruptcy

Economics

Geometry

Expert Systems with Applications

The optimal forecasting horizon of bankruptcy prediction models is usually one year. Beyond this point, their accuracy decreases as the horizon recedes. However, the ability of models to provide good mid-term forecasts is an essential characteristic for financial institutions due to prudential reasons. This is why we have studied a method of improving their forecasts up to a 5-year horizon. For this purpose, we propose to quantize how firm financial health changes over time, typify these changes and design models that fit each type. Our results show that, whatever the modeling technique used to design prediction models, model accuracy can be significantly improved when the horizon exceeds two years. They also show that when our method is used in combination with ensemble-based models, model accuracy is always improved whatever the forecasting horizon, when compared to traditional models used by financial institutions. The method we propose in this article appears to be a reliable solution that makes it possib...

Dynamics of firm financial evolution and bankruptcy prediction