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Duan Yuezhong

Economics and Management School of

Beijing University of Posts and

Telecommunications

Duanyuezhong@ta139.com

Xie xiguo

Economics and Management School of

Beijing University of Posts and

Telecommunications

Xiexiguo@ta139.com

Jin Yongsheng

Economics and Management School of

Beijing University of Posts and

Telecommunications

jys1900@yahoo.com.cn

Cheng Che

China University of Petroleum (HD)

College of Economics and Management

Dongying , China

bybsh@hotmail.com

Abstract

To the problem of the financial risk management,

the paper brings forward a new model based on main

component analysis method and multi-classes support

vector machines. In one hand, the main component

analysis method was used to reduce the number of

indexes and to improve the efficiency. In the other

hand, the multi-classes support vector machines was

used to classify the warning accurately. Because the

new model can not only improve the efficiency but also

improve the precision, it is proved that the new model

is a more feasible method than any other methods

before.

Keyword: financial risk management, main

component analysis method, multi-classes SVM

I. INTRODUCTION

From 1938 to now, there are many models have

been used to study financial risk management. For

example, RAROC, VaR, Risk Metrics, Credit Metrics,

Enterprise total risk management and so on. But these

models all have some limitations, like complexity of

calculation and low precision [1].

This paper brings forward a new model based on

main component analysis method and multi-classes

support vector machines.

To the problem that there are many indexes to affect

financial risk management, the main component

analysis method is used to reduce the number of

indexes and play down the complexity of analysis.

Multi-classes Support vector machine is an important

area of statistical learning theory. Because it is based on

the structure risk minimize and can disposal the small

swatch, it holds the better extensive ability [4]. It is the

abreast of the times and the most accurate method.

Therefore, the new model based on main component

analysis method and multi-classes support vector

machines can not only improve the efficiency but also

improve the precision, it is proved that the new model is

a more feasible method than any other methods before.

The paper includes 4 sections. Section 2 introduces

theories related to rough set and multi-classes support

vector machine. Section 3 elaborates on the model

proposed in this study. Section 4 concludes the study.

II.Theories related to rough set and

multi-classes SVM

This section will introduce the theories related to

main component analysis method and multi-classes

support vector machine.

A. Main component analysis method

Main component analysis method is a multivariate

statistical analysis method, which changes several

indexes into few comprehensive ones. It adopts a

method to reduce indexes and find out some

comprehensive variables to represent the original ones.

The unrelated comprehensive ones can possibly reflect

2009 Third International Symposium on Intelligent Information Technology Application

978-0-7695-3859-4/09 $26.00 2009 IEEE

DOI 10.1109/IITA.2009.140

194

2009 Third International Symposium on Intelligent Information Technology Application

978-0-7695-3859-4/09 $26.00 2009 IEEE

DOI 10.1109/IITA.2009.140

194

the original information. The basic steps of

multivariable comprehensive evaluation by using main

component analysis method are as follows[6]:

1Indexes standardization

the number of sample is nthe number of index is

m

XX

ij

m

i12.....n.

j12..... m,

X

ij

represents the variable of index j of sample i .

The formula is Y

ij

( X

ij

X

j

) / S

j

X

j

n

1

=

n

i 1

X

ij

S

j

[

1

1

n

=

n

i 1

( X

ij

X

j

)

2

]

1/2

2Calculation of the covariance matrix R

R [r

ij

]

m

m

r

ij

is the correlation coefficient of X

i

and X

j

.

3Calculation of the eigenvalues and the eigenvectors

of the covariance matrix R.

We use the eigenequation to get eigenvalues in

numerical order and relevant eigenvectors.

Because of 0 ] [ = R I

We get eigenvalues 123m in

numerical order and relevant eigenvectors U1U2

U3Um

U

i

u

i1

u

i2

u

i3

.......... u

im

Then the main component

Z

i

u

i1

Y

i1

u

i2

Y

i2

.u

im

Y

im

i123..m

4. The process of the l main component analysis

method is as follows:

The weight of each main component is

Qi

i

/

=

m

i 1

i

.

According to

=

w

i 1

i

/

=

m

i 1

i

>85%,

We select the first w main components to conduct

calculation..

F

=

w

f 1

Ff

=

w

f 1

QfZ

f

f123..w

Finally, we can compare each F and then place

them in numerical order.

These are the theories related to the main

component analysis method.

B. Multi-classes SVM

The support vector machine is a new and promising

classification and regression technique proposed by

Vapnik and his group at AT&T Bell Laboratories.

The SVM learns a separating hyperplane to

maximize the margin and to produce a goad

generalization capability. Recent theoretical research

work has solved existing difficulties in using the SVM

in practical applications. Until now, it has been

successfully applied in many areas, such as face

detection, hand-written digit recognition, and data

mining, etc[8].

In theory, SVM classification can be traced back to

the classical structural risk minimization (SRM)

approach, which determines the classification decision

function by minimizing the empirical risk, as

R =

k

1

k

i

y x f

1

) (

where k and f represent the size of examples and the

classification decision function, respectively. For SVM,

the primary concern is determining an optimal

separating hyperplane that gives a tow generalization

error. Usually, the classification decision function in the

linearly separable problem is represented by[12]

f(x) = sign (w x + b)

In SVM, the optimal separating hyperplane is

determined by giving the largest margin of separation

between different classes. This optimal hyperplane

bisects the shortest line between the convex hulls of the

two classes. The optimal hyperplane is required to

satisfy the following constrained minimization, as

195 195

Min:

2

1

w

2

y

i

(w xi + b) 1

For the linearly non-separable case, the

minimization problem can be modified to allow

misclassified data points.

SVM can he applied to mufti-class classification by

combining SVMs[12].

Min (w, ) =

2

1

w

2

+ C

=

l

i 1

y m

m

i

s.t. (w

yi

x

i

) b

yi

(w

m

x

i

) b

m

2

m

i

m

i

0

i = 1,2 ....... l

m, y

i

{1,2,........,k}

m y

i

The decision function is as follow

f(x) = argmax [(w

i

x) b

i

],

i = 1,2 ....... k.

These are the theories related to the multi-classes

support vector machine.

III.The introduction of the new model

The paper divided the level of financial risk into

five grades: low, lower, middle, higher, high. Then we

use twelve indexes to value the financial risk:

diversification, liquidity, asset/ liability, valuation of

assets, trading control, transparency, economic

intelligence, capital adequacy, asset quality, financial

information, intellectual property of financial product,

financial intelligence system.

First, we used the main component analysis method

to delete some indexes which are not important to the

information system security value.

Second, the data set is divided into 5 parts. Each

data set is input to their opposite SVM. The scores of

different classes are added up and the class which has

the highest score is accepted as the class of the warning

system.

Third, the data set is divided into two parts: some

are training data, the other are testing data. The training

data are trained by SVRM, and the testing data are input

to the SVRM which has been trained to test the SVRM.

At last, the new data may be input into the model

and we may get the five grades of the financial risk

level.

The chart of the model based on fuzzy theory and

multi-classes support vector machine is as follow.

Figure1. The chart of the new model

IV. Conclusions

Main component analysis method

Multiclasses support vector

machine

The origin training data

The main component

analysis method

The second

training data

Testing

data

SVM

1

SVM

2

SVM

5

196 196

The paper brings forward a new model based on

main component analysis method and multi-classes

support vector machines.

To the problem that there are many indexes to affect

financial risk management, the main component

analysis method is used to reduce the number of

indexes and play down the complexity of analysis.

Multi-classes Support vector machine is an important

area of statistical learning theory. Because it is based on

the structure risk minimize and can disposal the small

swatch, it holds the better extensive ability[4]. It is the

abreast of the times and the most accurate method.

Therefore, the new model based on main component

analysis method and multi-classes support vector

machines can not only improve the efficiency but also

improve the precision, it is proved that the new model is

a more feasible method than any other methods before.

Reference

[1] HUANG Hai-feng, MA Hong-yi, the main methods of

Chinese financial risk management, Economic

Theories and Economic Management, 2005.

[2] ZHANG Xi-yu, the VAR method of financial risk

management,

Enterprise Economy, January 2003.

[3] GU Xiu-juan, the financial risk management: the

development of theories and technologies, Economic

Survey, No 1, 2007.

[4] XIAO Wenbind, FEI Qi, a Study of Personal Credit

Scoring Models on Support Vector Machine with

Optimal Choice of Kernel Function Parameters,

Systems Engineering Theory & Practice, the tenth,

2006

[5] TANG Jia-fu, LI Run-sheng, SHI Yong-gui, FAN

Chun-guang, Application of Principal Component

Analysis to Performance Evaluation of Telecom

Enterprises, Journal of Northeastern University

(Natural Science), No 4, 2008.

[6] Jiang Huiyuan, Wang Wanxiang, Application of

Principal Component Analysis in Synthetic Appraisal

for Multi-objects Decision-making, Journal of

Wuhan University of Technology , No 4, 2003.

[7] XIA Guoen, JING Weidong, ZHANG Gexiang,

Synthetic Evaluation Method Baste Support Vector

Classifier and Regression Machine, Journal of

Southwest Jiaotong University, Vol 41, 2006.

[8] XIAO Wenbind, FEI Qi, a Study of Personal Credit

Scoring Models on Support Vector Machine with

Optimal Choice of Kernel Function Parameters,

Systems Engineering Theory & Practice, the tenth,

2006.

[9] Steve Gunn, "Support Vector Machines for

Classification and Regression", Image Speech and

Intelligent Systems Group, 10 May 1998.

[10] Harris Drucker, Chris J.C. Burges, Linda Kaufman,

Alex Smola, Vladimir Vapnik, Support Vector

Regression Machines, Advances in Neural

Information Processing Systems, 1997: 9(S): 155-161.

[11] Dacheng Tao, Xiaoou Tang, Xuelong Li, and

Xindong Wu, Asymmetric Bagging and Random

Subspace for Support Vector Machines-Based

Relevance Feedback in Image Retrieval, IEEE

Transactions on Pattern Analysis and Machine

Intelligence, VOL. 28, NO.7, 2006, pp.1088-1099.

[12] GAO Shang, YANG Jingyu, Assessing the

effectiveness based on principal component analysis and

support vector machine, Systems Engineering and

Electronics, Vo1.28, No.6, 2006.

197 197

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