Link to the University of Pittsburgh
Link to the University Library SystemContact us link
AEI Banner

Failure prediction models: performance, disagreements, and internal rating systems. NBB Working Papers. No. 123, 13 December 2007

Mitchell, Janet and Roy, Patrick Van. (2007) Failure prediction models: performance, disagreements, and internal rating systems. NBB Working Papers. No. 123, 13 December 2007. [Working Paper]

[img]
Preview
PDF
Download (165Kb) | Preview

    Abstract

    We address a number of comparative issues relating to the performance of failure prediction models for small, private firms. We use two models provided by vendors, a model developed by the National Bank of Belgium, and the Altman Z-score model to investigate model power, the extent of disagreement between models in the ranking of firms, and the design of internal rating systems. We also examine the potential gains from combining the output of multiple models. We find that the power of all four models in predicting bankruptcies is very good at the one-year horizon, even though not all of the models were developed using bankruptcy data and the models use different statistical methodologies. Disagreements in firm rankings are nevertheless significant across models, and model choice will have an impact on loan pricing and origination decisions. We find that it is possible to realize important gains from combining models with similar power. In addition, we show that it can also be beneficial to combine a weaker model with a stronger one if disagreements across models with respect to failing firms are high enough. Finally, the number of classes in an internal rating system appears to be more important than the distribution of borrowers across classes.

    Export/Citation:EndNote | BibTeX | Dublin Core | ASCII (Chicago style) | HTML Citation | OpenURL
    Social Networking:
    Item Type: Working Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > Single Market > capital, goods, services, workers
    EU policies and themes > Policies & related activities > economic and financial affairs > business/private economic activity
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 02 Jun 2009
    Page Range: p. 35
    Last Modified: 15 Feb 2011 18:12
    URI: http://aei.pitt.edu/id/eprint/11012

    Actions (login required)

    View Item

    Document Downloads