European Journal of Operational Research 180 (2007) 128

www.elsevier.com/locate/ejor

Invited Review

Bankruptcy prediction in banks and rms via statistical

and intelligent techniques A review
P. Ravi Kumar, V. Ravi *

Institute for Development and Research in Banking Technology, Castle Hills Road # 1, Masab Tank, Hyderabad 500 057 (AP), India

Received 19 July 2005; accepted 11 August 2006

Available online 17 November 2006

Abstract

This paper presents a comprehensive review of the work done, during the 19682005, in the application of statistical and
intelligent techniques to solve the bankruptcy prediction problem faced by banks and rms. The review is categorized by
taking the type of technique applied to solve this problem as an important dimension. Accordingly, the papers are grouped
in the following families of techniques: (i) statistical techniques, (ii) neural networks, (iii) case-based reasoning, (iv) decision
trees, (iv) operational research, (v) evolutionary approaches, (vi) rough set based techniques, (vii) other techniques subsum-
ing fuzzy logic, support vector machine and isotonic separation and (viii) soft computing subsuming seamless hybridiza-
tion of all the above-mentioned techniques. Of particular signicance is that in each paper, the review highlights the source
of data sets, nancial ratios used, country of origin, time line of study and the comparative performance of techniques in
terms of prediction accuracy wherever available. The review also lists some important directions for future research.
 2006 Elsevier B.V. All rights reserved.

Keywords: Bankruptcy prediction; Banks; Firms; Statistics; Neural networks; Fuzzy logic; Case-based reasoning; Decision trees; Evol-
utionary approaches; Operations research; Rough sets; Support vector machine and soft computing; Intelligent techniques

1. Introduction upon (i) how nancially solvent it is at the inception,

The prediction of bankruptcy for nancial rms
especially banks has been extensively researched
area since late 1960s [3]. Creditors, auditors, stock-
holders and senior management are all interested in
bankruptcy prediction because it aects all of them
alike [121]. The health of a bank or rm in a highly
competitive business environment is dependent
*
Corresponding author. Tel.: +91 40 23534981; fax: +91 40
23535157.
E-mail addresses: vravi@idrbt.ac.in, rav_padma@yahoo.com
(V. Ravi).
(ii) its ability, relative exibility and eciency in cre-
ating cash from its continuous operations, (iii) its
access to capital markets and (iv) its nancial capac-
ity and staying power when faced with unplanned
cash short-falls. As a bank or rm becomes more
and more insolvent, it gradually enters a danger
zone. Then, changes to its operations and capital
structure must be made in order to keep it solvent
(http://www.solvency.com/solvency.htm).
The most precise way of monitoring banks is by
conducting on-site examinations. These examina-
tions are conducted on a banks premises by regu-
lators every 1218 months, as mandated by the

0377-2217/$ - see front matter  2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejor.2006.08.043
2 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
Federal Deposit Insurance Corporation Improve-
ment Act of 1991. Regulators utilize a six part rat-
ing system to indicate the safety and soundness of
the institution. This rating, referred to as the CAM-
ELS rating, evaluates banks according to their basic
functional areas: capital adequacy, asset quality,
management expertise, earnings strength, liquidity
and sensitivity to market risk. While CAMELS rat-
ings clearly provide regulators with important infor-
mation, Cole and Gunther [20] reported that these
CAMELS ratings decay rapidly. Fraser [30] noted
that banks perform better by holding relatively
more securities and fewer loans in their portfolios.
Gady [32] and Fraser [30] showed that core deposit
funding is benecial for banks, particularly demand
deposits, which are non-interest bearing. Gady [32]
has indicated that high-performance banks are able
to generate more interest or non-interest income
than under performing banks. Wall [117] observed
that higher prot banks rely more on equity fund-
ing. Brewer et al. [15] observed that rms used
the derivative instruments to change their risk expo-
sure. They also concluded that there was a negative
correlation between risk and derivatives usage.
Haslem et al. [44] determined the impact of types
of strategies followed by individual banks related
to the relative protability performance. Kwast
and Rose [60] employed statistical cost accounting
techniques to examine the relationship between
bank protability and pricing and operating
eciency.
This paper presents a comprehensive survey of a
number of research works published during 1968
2005, where various statistical and intelligent tech-
niques were applied to solve bankruptcy prediction
problem in banks and rms. The usefulness of the
current review paper is that the papers are catego-
rized, primarily, according to the technique
employed therein. This aspect paves the way for
the researchers from the statistical and the articial
intelligence/soft computing community to shift
focus on this exciting problem of bankruptcy pre-
diction by applying their newest and novel ideas.
This will only enhance and enrich the bankruptcy
prediction research further as these researchers are
likely to come out with robust and high performing
models. The review paper is aimed at attracting
fresh graduates, researchers and academics from
nance, banking, statistics and articial intelli-
gence/soft computing, since bankruptcy prediction
is a multi-disciplinary area. The current review is
dierent from the earlier reviews, presented in Sec-
tion 3, in the following aspects: (i) It is categorized
with respect to the techniques employed. (ii) It is
by far, the most comprehensive and organized with
respect to various dimensions of review such as the
nancial ratios used, source of data set, country of
origin, time line of study, type of industry viz., bank
or rm as detailed in Tables 2 and 3. (iii) It also
gives the reader a brief overview of the techniques
employed. (iv) It gives the reader an unbiased com-
parison of the statistical and intelligent techniques.
(v) It can be considered as a starting point to pursue
research in bankruptcy prediction.
1.1. Earlier reviews
This section presents an overview of the review
papers published earlier on bankruptcy prediction.
Scott [99] reviewed several empirical and theoretical
models and found a substantial amount of overlap
between these two lines of research. He concluded
that the success of empirical models suggested the
existence of a strong underlying regularity, though
they are not based on explicit theory. Dimitras
et al. [25] presented a review of the articles published
during 19321994 in various journals specialized in
accounting, nance, operation research and decision
science. They selected 47 articles restricted to (i)
journal articles that presented models and (ii) indus-
trial and retail applications. Their framework of
study was based on the country, year of publication,
industry type, sample periods and method. They
reviewed a total of 59 models and variables used
in these articles. OLeary [84] proposed a meta
analysis of the use of neural networks to predict
corporate failure. His review was across dimensions
such as the software used, the input variables, the
nature of the hidden layer used, number hidden
nodes and statistical analysis of results. Tay and
Shen [110] reviewed the application of various
rough set based models to bankruptcy prediction
and concluded that rough set models were promis-
ing alternative to conventional methods. Daubie
and Meskens [23] reviewed the prediction models
applied to business failure in banks and rms. They
discussed the causes, symptoms, process and reme-
dies of failure. They reviewed papers published dur-
ing 19682000 in journals specialized in accounting,
nance, operations research and decision science.
Calderon and Cheh [17] reviewed the applications
of neural networks in bankruptcy prediction. For
every study they presented the number of input vari-
ables, learning sample size, testing sample size and
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
software used. They explained the comparative e-
ciency of dierent techniques.
The rest of the paper is organized as follows:
Section 2 presents an overview of the intelligent
techniques. Section 3 reviews papers dealing with
statistical techniques while Section 4 presents the
works employing various NN architectures. Section
5 presents CBR applications while Section 6
describes decision tree applications to the problem.
Section 7 reviews the applications of evolutionary
approaches and Section 8 presents applications of
operational research to the problem. Section 9 pre-
sents the papers employing rough sets and Section
10 describes the application of other techniques
subsuming fuzzy logic, support vector machine
and isotonic separation to the problem. Finally,
Section 11 presents the soft computing applications.
Section 12 presents some of the important insights
that emerged out of the survey. Section 13 suggests
some future research directions in the eld and con-
cludes the review.
2. Review methodology
As mentioned earlier, the review is conducted in
two broad categories: (i) statistical and (ii) intelli-
gent techniques. Among statistical techniques, the
methods covered are: linear discriminant analysis
(LDA), multivariate discriminate analysis (MDA),
quadratic discriminant analysis (QDA), logistic
regression (logit) and factor analysis (FA). The
intelligent techniques covered in the study belong
to (i) dierent neural network (NN) architectures
including multi-layer perception (MLP), probabilis-
tic neural networks (PNN), auto-associative neural
network (AANN), self-organizing map (SOM),
learning vector quantization (LVQ) and cascade
correlation neural network (Cascor), (ii) decision
trees, (iii) case-based reasoning, (iv) evolutionary
approaches, (v) rough sets, (vi) soft computing
(hybrid intelligent systems), (vii) operational
research techniques including linear programming
(LP), data envelopment analysis (DEA) and qua-
dratic programming (QP), (viii) other intelligent
techniques including support vector machine, fuzzy
logic techniques. Under each category, the papers
are reviewed in the chronological order. Thus the
most important dimension of the present review is
the type of techniques applied. The review is con-
ducted across other dimensions also such as (i)
study pertaining to bank or rm (type of rm if
mentioned), (ii) source of data, (iii) various nancial
3
ratios used as explanatory variables, (iv) the years
during which data was collected, (v) number of
years prior to which prediction was made (if avail-
able) and (vi) results obtained (when available in
concise form) in each study. Further, the review
concentrated on the papers published in peer-
reviewed journals/international conferences/edited
volumes in the areas of accounts, nance, manage-
ment, operational research, neural networks, expert
systems and decision support systems. All the
unpublished works in terms of Ph.D. thesis, work-
ing papers and internal reports are excluded from
the scope of the review. Moreover, in a paper, when
multiple techniques are compared in their stand-
alone mode, the technique proposed in that paper
is taken as the main criterion and accordingly the
paper is categorized in that family. For example,
when in a paper, NN, DA and logit (logistic regres-
sion) are compared in their stand-alone mode and
NN is proposed in that paper, then the paper is
reviewed under the NN section.
The present review indicates that neural networks
family with 25 papers is the most widely applied
technique. The soft computing family with 15 papers
and statistical family with 11 papers follow this.
Then, rough sets were applied in six papers and other
techniques accounted for ve papers, while CBR and
OR techniques had four papers each. Also, evolu-
tionary approaches and decision trees gured in
three and two papers, respectively. Further, ve ear-
lier review papers are also included in the current
review. Table 1 presents the main idea behind the
intelligent techniques, their advantages and disad-
vantages. Table 2 lists the nancial ratios used in
each of the papers. Table 3 presents for all papers,
the details such as the entity for which the study
was done banks or rms; source of data; country
of origin; sample size; techniques used in the study
and the time line of the study and the number of
years prior to prediction, wherever available.
2.1. Overview of intelligent techniques
2.1.1. Fuzzy set theory
Fuzzy set theory, proposed by Zadeh [124], has
found a number of applications. It is a theory of
graded concepts. It provides a mathematical frame-
work where vague, conceptual phenomena can be
rigorously studied [127]. Fuzzy logic models human
experiential knowledge in any domain. When
applied to solve process control or prediction prob-
lems fuzzy logic takes the help of the knowledge of
4 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128

Table 1
Merits and demerits of intelligent techniques
Technology Basic idea
1 FL Models imprecision and ambiguity
in the data using fuzzy sets and
incorporates the human
experiential knowledge into the
model
2 NN Learn from examples using several
constructs and algorithms just like
a human being learns new things
3 GA Mimics Darwinian principles of
evolution to solve highly nonlinear,
non-convex global optimization
problems
4 CBR Learns from examples using the
euclidean distance and k-nearest
neighbor method
5 Rough sets They use lower and upper
approximation of a concept to
model uncertainty in the data
6 SVM It uses statistical learning theory to
perform classication and
regression tasks
7 Decision They use recursive partitioning
trees technique and measures like
entropy to induce decision trees on
a data set
8 DEA It uses linear programming to rank
various alternatives/business units
according to some input and out
variables
9 SC Hybridizes fuzzy logic, neural
networks, genetic algorithms, etc.
in several forms to derive the
advantages of all of them
Advantages
Good at deriving human
comprehensible fuzzy ifthen rules;
It has low computational
requirements
Good at function approximation,
forecasting, classication, clustering
and optimization tasks depending
on the neural network architecture
Good at nding global optimum of a
highly nonlinear, non-convex
function without getting trapped in
local minima
Good for small data sets and when
the data appears as cases; similar to
the human like decision-making
They yield ifthen rules involving
ordinal values to perform
classication tasks
It yields global optimal solution as
the problem gets converted to a
quadratic programming problem; It
can work well with few samples
Many of them can solve only
classication problems while CART
solves both classication and
regression problems. They yield
human comprehensible binary if
then rules
It has found numerous applications
and gives exact solution
It amplies the advantages of the
intelligent techniques while
simultaneously nullifying their
disadvantages
Disadvantages
Arbitrary choice of Membership
function skews the results, although
triangular shape is the most often
used one. Secondly, the plethora of
choices for membership function
shapes, connectives for fuzzy sets
and defuzzication operators are the
disadvantages
The determination of various para-
meters associated with training
algorithms is not straightforward.
Many neural network architectures
need a lot of training data and
training cycles (iterations)
Does take long time to converge;
May not yield global optimal
solution always unless it is aug-
mented by a suitable direct search
method
Cannot be applied to large data sets;
poor in generalization
It can be (a) sometimes impractical
to apply as it may lead to an empty
set (b) sensitive to changes in data
and (c) inaccurate
Selection of kernel and its
parameters is a tricky issue. It is
abysmally slow in test phase. It has
high algorithmic complexity and
requires extensive memory
Over tting can be a problem. Like
neural networks, they too require a
lot of data samples in order to get
reliable predictions
It yields only relative scoring of the
business units and not absolute
ratings
Apparently, it has no disadvantages.
However, it does require good
amount of data, which is not exactly
a disadvantage nowadays

the domain expert and employs fuzzy mathematics
to come out with fuzzy inference systems. Fuzzy
logic can also be used to derive fuzzy ifthen rules
from data to solve classication problems.
2.1.2. Neural networks
Neural networks [62,72] oer a computational
paradigm inspired by biological neural networks
of human nervous system. A neural network is a
system of massively parallel, interconnected com-
puting units called neurons, arranged in layers.
The neural networks found extensive applications
in nancial services. The multi-layer perceptron
(MLP) [95], radial basis function network (RBFN)
[81], probabilistic neural network (PNN) [104], cas-
cade correlation neural network (Cascor) [28],
learning vector quantization (LVQ) [35,56], self-
organizing feature map (SOM) [56] are some of
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128 5

Table 2
Financial ratios (variables) in each paper
Ref # Variables
[1] Cash ow/total liabilities, current assets/current liabilities (current ratio), inventories turnover, net income/total sales, net
income/total assets, net working capital/total assets, owners equity/total assets, (total borrowings + bonds payable)/total
assets
[2] Net income/total assets (return on assets (ROA)), net loan losses/adjusted assets, net loan losses/total loan, (net loan
losses + provision for loan losses)/income, non-performing loans/total assets
[5] Common equity/total capital (capitalization), cumulative protability, debt services, stability of earnings, roa, liquidity, size
[6] Debt cost, debt quality, growth, indebtedness, share of labour costs, short-term liquidity, size, turnover of assets
[7] Book value/total assets, cash ow/total assets, gross operating income/total assets, ROA, price/cash ow, rate of change of
cash ow per share (ROC), rate of change of stock price, stock price volatility
[8] Cash/current liabilities, cash/net sales, cash/total assets, cash ow/current liabilities, cash ow/total assets, cash ow/total debt,
current ratio, current assets/net sales, current assets/total assets, current liabilities/equity, earnings before interest and taxes
(EBIT)/total interest payments, equity/xed assets, equity/net sales, inventory/net sales, long-term debt/equity, market value of
equity/book value of debt, net income/total assets, net quick assets/inventory, net sales/total assets, operating income/total
assets, quick assets/current liabilities, quick assets/net sales, quick assets/total assets, rate of return/common stock holders,
retained earnings/total assets, return on stock, total debt/equity, total debt/total assets, working capital/equity, working
capital/net sales, working capital/total assets
[9] EBIT/total assets, market capitalization/total debt, retained earnings/total assets, sales/total assets, working capital/total assets
[11] Complexity of capital structure, degree of competitiveness, rm age, fraud, intangible assets/net sales, natural log of total assets
deated the gross domestic product, ROA, ownership concentration, past losses, resignation, secured interest bearing debt/
total liabilities, total interest bearing debt/total liabilities
[12] Agricultural loans/total assets, commercial real estate loans/total assets, construction loans/total assets, income before extra
items, large time deposits/total assets, insiders loans over net loans, natural log(total assets), net charge os/total loans, ROA,
net interest income/total assets, net loans/total assets, non-interest income/total assets, non-performing loans/primary capital,
non-performing loans/total assets, past due loans/gross loans, primary capital/adjusted assets, provision for loan losses/total
assets, restructured loans/gross loans, return on equity, security gains (losses) and extra items/total assets, short-term assets less
large liabilities/total assets, total capital/total loans, total equity capital, total overhead expenses/total assets, undivided prot
and capital reserve to total assets, yield on total assets
[13] Cash ow/total debt, current ratio, current liabilities/total debts, gross prot/sales, net income/stockholders equity, roa, sales/
total assets
[16] Cash/current liabilities, cash/total assets, cost of goods sold/inventory, current ratio, current assets/total assets, current assets/
total sales, current liabilities/total assets, EBIT/total assets, inventory/sales, net income/net worth, net income/sales, ROA,
quick assets/sales, quick assets/total assets, retained earnings/inventory, retained earnings/total assets, sales/cash, sales/net
worth, sales/total assets, total assets/gross national product (GNP) price-level, total liabilities/net worth, total liabilities/total
assets, working capital/sales
[18] Quick ratio, income ratio, interest expenses/average non-protable assets, interest expenses/average protable assets, interest
expenses/total expenses, interest income/interest expenses, liquid assets/(deposits + non-deposit funds), liquid assets/total
assets, net working capital/total assets, (salary and employee benets + reserves for retirement)/no of personnel, (shareholders
equity + total income)/(depreciation + non-depreciation funds), (shareholders equity + total income)/total assets,
(shareholders equity + total income)/(total assets + contingencies and commodities), standard capital ratio
[19] Cash/restricted current assets, equity ratio(equity/total assets), expired taxes, retained earnings/total assets, inventories, gross
return, coverage of debt, net return, current ratio, quick ratio, debt ratio
[24] Abnormal increase in inventory and receivables, quick ratio, current ratio, debt/equity, dividend, funds ow ratio, ROA, net
worth, sales/total assets, total assets, trend in net income, working capital/total assets
[26] Current ratio, current liabilities/total assets, gross prot/total assets, inventories/working capital, (long-term debt + current
liabilities)/total assets, net income/gross prot, ROA, net worth/(net worth + long-term debt), quick assets/current liabilities,
working capital/net worth
[29] Quick ratio, current ratio, income ratio (income/working capital)
[31] Cash ow/total debt, current ratio, current assets/total assets, EBIT/total assets, log(interest coverage + 15), log (total assets),
market value of equity/total capitalization, ROA, quick assets/current liabilities, quick assets/total assets
[36] Working capital/total assets, retained earnings/total assets, EBIT/total assets, market value of equity/total assets, sales/total
assets
[37] EBIT/total assets, net income/net worth, total liabilities/total assets, total liabilities/cash ow, interest expenses/sales, general
and administrative expensive/sales, managers work experience, rms market niche position, technical structure facilities,
organization-personnel, competitive advantage of rms, market exibility
[44] Domestic cash, domestic investment securities, foreign cash, foreign investment securities, net domestic loans, net foreign loans,
net income, total assets, total domestic interest bearing deposits, total domestic non-interest-bearing deposits, total equity
capital, total foreign interest bearing deposits, total foreign non-interest bearing deposits
(continued on next page)
6 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128

Table 2 (continued)
Ref # Variables
[45] EBIT/total assets, market value of equity/total debt, retained earnings/total assets, sales/total assets, working capital/total
assets
[51] Net operating cash ow to total assets, cash resources to total assets, cash ow cover (net operating cash ow to annual interest
payments), sales revenue to total assets, total debt to total equity, total debt to gross operating cash ow, working capital to
total assets (wc = current assets current liabilities)
[53] Gross prot margin ((net sales-cost of goods sold)/net sales), market value of common stock, natural logarithms of tangible
asset turnover, (net income + depreciation)/number of shares, (cash ow per share), net income/total of common equity
(earnings per share), sales/cash, sales/inventories, sales/receivables, total debt/total assets, total debt/total capital, working
capital/total assets
[55] Equity ratio (equity/total assets), net income before depreciation and extraordinary items, net income before depreciation and
extraordinary items of the previous year, operating margin
[57] Allowance for loan losses/total assets, bank holding companies total assets, bank total assets/bank holding co. (bhc) total
assets, certicate of deposit/total deposits, maximum change in assets/mean assets, maximum change in assets/mean change
assets, maximum change in loans past due at least 90 days/mean of numerator, net income after taxes/total assets, net interest
income/total assets, net loan charge-os/total assets, non-deposit liabilities/total liabilities, provision for loan losses/total
assets, sum of key asset accounts/total assets, total assets, total equity/total assets, total loans and leases/total assets, total
securities/total assets
[62] EBIT/total assets, market value of equity/book value of debt, retained earnings/total assets, sales/total assets, working capital/
total assets
[64] Capital expenditure, common shares traded, consumer price index, current account balance/gross domestic product, current
assets/common shareholders equity, depreciation expenses, dividend/share, earnings/share, eective exchange rate, federal
budget/gross domestic product, government spending/gross domestic product, (long-term debt + short-term debt)/total
assets, market capitalization, money supply, net income/net sales, net sales/total assets, pre-tax income/net sales, purchase
price of crude oil, relative strength index, research expenses, short-term interest rate, spread between short-term and long-term
interest rate, tax deferral and investment credit, total sources of fund/ total uses of fund, trade balance/gross domestic
product
[65] Quick ratio, cash ow/sales, cash ow/stock holders equity, cash ow/total assets, cash ow/total borrowings and bond,
change in payable/receivables, change in inventory/current assets, change in inventories turnover, change in payables/
current liabilities, current ratio, current ratio trend, debtos ratio (days) (debtors * 365 days/sales), dividend/capital stock,
nancial expenses/sales, xed assets/(stockholders equity + long-term liabilities), xed assets turnover, xed asset
composition, xed liability ratio, xed ratio, gross prot/sales, growth rate of xed asset, growth rate of net income, growth
rate of ordinary income, growth rate of sales, growth rate of total liabilities, growth rate of total assets, interest coverage
ratio, interest ratio, inventory/current assets, inventories turnover, net income/capital stock, net income/sales, net income/
stockholders equity, net income/total assets, net working capital/total assets, net working capital turnover, operating
income/sales, ordinary income/business capital, ordinary income/sales, ordinary income/stockholders equity, ordinary
income/total assets, payable/current liabilities, payables/inventories, payables/receivables, stock holders equity/total assets,
stock holders equity turnover, total assets turnover, (total borrowings + bonds payable)/total assets, total liability
composition
[66] EBIT/total assets, market capitalization/total debt, retained earnings/total assets, sales/total assets, working capital/total
assets
[67] Average market equity/total capital, auditor, auditor opinion, bond rating, book equity/total capital, quick ratio, cash ow/
xed charges, cash ow/share, cash ow/total debt, cash ow margin, capital expenditure/share, capital lease, cost of goods
sold/sales, current ratio, current liabilities/total liabilities, dividend, earnings/5 years maturity, earnings/total debt, earnings
before interest and taxes (EBIT) drop, EBIT/sales, EBIT/share, EBIT/total assets, EBIT/total tangible assets, xed charge
coverage, interest coverage, inventory turnover, log (interest coverage), log (total assets), long-term debt/equity, margin drop,
market equity/total capital, market value/total liabilities, net available for capital/total capital, net available for total capital/
sales, ROA, net income/total debt, net prot margin, number of employees, operating income/sales, price/earning ratio, quick
assets/sales, receivables turnover, retained earnings/total assets, retained earnings/tangible assets, sales/cash, sales/gross xed
assets, sales/receivables, sales/total assets, sales/total capital, sales/total tangible assets, standard deviation (EBIT/total assets),
standard deviation (log (EBIT/total assets)), total debt/total assets, total debt/total capital, total investment, working capital/
long-term debt, working capital/total assets, worth/total debt
[69] Average salary/employee, borrowing ratio, quick ratio, cash ratio(cash and market securities/total liabilities), cash earnings/
share, cash ow margin, capital employed/employee, capital gearing, coverage debt, creditors ratio (days)(creditor * 365 days/
cost of sales), creditors turnover, current ratio, debtos ratio (days)(debtors * 365 days/sales), debtos turnover, earnings margin,
nancial debt ratio, gross return, income gearing, inventories, net prot margin, net return, operating prot margin, operating
prot/employee, pre-tax prot margin, preferences and loan/equity and reserves, quick assets/total assets, return on capital
employed, return on long-term capital, return on net xed assets, return on shareholders capital, return on shareholders
equity, sales/employee, stock ratio (days), stock turnover, tax ratio, trading prot margin, turnover/assets employed, turnover/
xed assets, turnover/net current assets, working capital/total assets
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128 7

Table 2 (continued)
Ref # Variables
[70] Auditor opinion, audit qualication, cash/total assets, cash/current liabilities, commercial paper rating, current ratio, current
assets/net sales, current assets/total assets, debt rating, funds ow/total liabilities, net income/total assets, net worth, number of
years of nancial statements in database, number of consecutive years negative net income, number of consecutive years sales
decline, quick assets/current liabilities, sales, sales/total assets, sales/working capital, standard deviation of common stock rate
of return, stock exchange, total liabilities/net worth, total liabilities/total assets, working capital/total assets, yearly dividend
[71] Charge-os/(net operating income + loss provision), commercial and industrial loans/total loans, dividends/net income, equity
capital/adjusted risk assets, gross capital/adjusted risk assets, gross capital/risk assets, gross charge-os/(net operating
income + loss provision), liquid assets/total sources of funds, loans/total assets, loans and leases/total sources of funds, loss
provision/(loans + securities), roa, net income/total assets, net interest margin/earning assets, net interest margin (taxable
equivalent)/earning assets, net liquid assets/total assets, non-interest expenses/operating revenue, operating expenses/operating
revenues, total assets, total operating expenses/operating revenue
[73] Accounts receivables/sales, cash/total assets, current ratio, current assets/total assets, current assets/sales, inventory/cost of
goods sold, long-term debt/total assets, ROA
[74] Cash/current liabilities, investment cash ow/net income, rm size, ROA
[75] Cash/current liabilities, coded to indicate opinion type, current ratio, dividends/net income, rm size, investment cash ow/net
income, leverage, ROA, Operating cash ow/net income, retained earnings/total assets, sales/total assets
[78] Current ratio, current liabilities/total assets, gross prot/total assets, inventories/working capital, (long-term debt + current
liabilities)/total assets, net income/gross prot, net income/net worth, ROA, net worth/net xed assets, net worth/(net worth +
long-term debt), quick assets/current liabilities, working capital/net worth
[79] Break even point ratio, bonds payable, cash ow/interest expenses, cash ow/(previous years short-term loan), cash ow/short-
term loan, cash ow/total debt, cash ow/total loans, capital stock turnover, depreciation ratio, EBIT/sales, xed assets/
(stockholders equity + long-term liabilities), xed assets turnover, xed ratio, gross value added/(property, plant and equip-
ment), gross value added/sales, gross value added/total assets, growth rate of tangible assets, interest coverage ratio, interest
expenses/total borrowings, interest expenses/total expenses, interest expenses/sales, inventories turnover, net income/sales, net
income/stockholders equity, ROA, net interest expenses/sales, operating assets turnover, ordinary income/ordinary expenses,
ordinary income/sales, ordinary income/stockholders equity, ordinary income/total assets, payable turnover, productivity of
capital, solvency ratio, stock holders equity/total assets, stock holders equity turnover, tangible assets turnover, total assets
turnover, (total borrowings + bonds payable)/total assets, variable cost/sales
[83] Current liabilities/current assets, funds provided by operations/total liabilities, log (total assets/GNP price-level index), net
income/total assets, one if total liabilities exceeds total assets, zero otherwise, one if net income was negative for the last two
years, otherwise zero, total liabilities/total assets
[85] Cash ow/total loans, coverage debt, current assets/total assets, current assets-cash/total assets, net income/loans, ROA, net
income/total equity capital, reserves/loans
[86] Quick ratio, nancial expenses/sales, xed assets/(stockholders equity + long-term liabilities), gross value added/tangible xed
assets, gross value added/sales, growth rate of property, plant and equipment, growth rate of sales, growth potential, rm
history, industry position, industry reputation, international competitive advantage, market niche/trend, operating assets
turnover, operating income/total assets, ordinary income/total assets, past payment record, personnel and sta hiring policy,
pricing competitive advantage, prot perspective, quality of management, relationship between labour and capital, size,
stockholders equity/total assets, technology development and quality innovation, total assets turnover, (total
borrowings + bonds payable)/total assets, working conditions and welfare facilities
[88] Current ratio, EBIT/interest expenses, EBIT/total assets, market value of equity/book value of debt, retained earnings/total
assets
[89] Cash at year end/total debt, cash ow/total debt, charge in inventories, charge in net nancials, charge in net other assets and
liability, charge in other current assets, charge in other current liabilities, charge in payables, charge in receivables, current
ratio, current ratio trend, dividend, earnings trend, xed coverage expenditure, long-term debt/net worth, net income/sales,
ROA, net investment ow, net operating ow, quick assets/current liabilities, quick assets/sales, sales trend (number
consecutive years of sales decline, total debt/total assets, trend of cash ow/total debt, trend of net income/sales, trend of net
income/total assets, trend of working capital/sales, working capital/sales
[92] EBIT/total assets, market value of equity/total debt, retained earnings/total assets, sales/total assets, working capital/total assets
[97] Cash/current liabilities, cash/total assets, cash ow/total assets, cash ow/total debt, current ratio, current assets/total assets,
current assets/total sales, current liabilities/equity, EBIT/total assets, equity/sales, inventory/sales, market value of equity/total
capitalization, market value of equity/total debt, ROA, net income/total capitalization, quick assets/current liabilities, quick
assets/total assets, quick assets/total sales, retained earnings/total assets, sales/total assets, total debt/total assets, working
capital/sales, working capital/total assets
[98] GAAP (generally accepted accounting principals) net worth/total assets (GNWTA), repossessed assets/total assets (RATA),
net income/gross income (NIGI), net income/total assets (NITA), cash securities/total assets (CSTA)
[100] EBIT/total assets, market value of equity/total debt, retained earnings/total assets, sales/total assets, working capital/total
assets
(continued on next page)
8 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128

Table 2 (continued)
Ref # Variables
[101] EBIT/total assets, market value of equity/total debt, retained earnings/total assets, sales/total assets, working capital/total
assets
[102] Quick ratio, current liabilities/total assets, nancial expenses/sales, liquidity ratio, net income/stockholders equity, operating
income/operating expenses, retained earnings/total assets, stock holders equity/total assets, value added/total cost
[104] Current ratio, EBIT/interest expenses, EBIT/total assets, market value of equity/book value of debt, retained earnings/total
assets
[106] Allowance for loan losses/total loans, asset growth, branch or unit bank, charter, core deposits/total assets, deposit insurance,
earning assets/total assets, federal reserve bank member, gains (losses) from sale of securities/total assets, holding company
aliation, interest income/total assets, (non-interest expenses-salary)/total assets, non-interest income/total assets, non-
performing assets/total assets, o balance sheet commitments/total assets, provision expenses/total loans, regional geographical
region, salary/total assets, total equity/total assets, total interest expenses/total assets, total loans/total assets, total securities/
total assets, volatile liabilities/total liabilities
[108] (Agriculture production and farm loans + real estate loans secured by farm land)/net loans and leases, (cash + US treasury and
government agency obligations)/total assets, capital/assets, commercial and industrial loans/net loans and leases, (federal funds
sold + securities)/total assets, (interest and fees on loans + income from lease nancing)/net loans and leases, loans to
individuals/net loan and leases, net charge os/average loans, ROA, provision for loan loses/average loans, return on average
assets, total expenses/total assets, total income/total expenses, total interest paid on deposits/total deposits, total loans 90 days
or more past due/net loans and leases, total loans and leases/total assets, total loans and leases/total deposits, total non-accrual
loans and leases/net loans and leases
[110] (Agriculture production and farm loans + real estate loans secured by farm land)/net loans and leases, (cash + US treasury and
government agency obligations)/total assets, capital/assets, commercial and industrial loans/net loans and leases, (federal funds
sold + securities)/total assets, (interest and fees on loans + income from lease nancing)/net loans and leases, interest income/
total assets, loans to individuals/net loan and leases, net charge os/average loans, net income/total assets, provision for loan
loses/average loans, real estate loans/(net loan & leases), return on average assets, total expenses/total assets, total interest paid
on deposits/total deposits, total loans 90 days or more past due/net loans and leases, total loans and leases/total assets, total
loans and leases/total deposits, total non-accrual loans and leases/net loans and leases
[114] After tax prot/total assets, cash/total liabilities, working capital/operational expenditure
[115] (Average tangible xed assets-average construction in progress)/number of employees, current ratio, interests, discounts and
bond issue expenses/sales, interests, discount expenses/value added, liquid assets/current liabilities, non-operating expenses/
sales, operating capital/number of employees, operating income/operating capital, ordinary income/sales, value added/
operating capital
[116] Asset (loan) quality, earnings, liquidity, management, miscellaneous
[119] (Cash + US treasury securities + federal funds sold and securities purchased under agreements to resell)/total assets, (certicate
of deposit over $100,000 + federal funds sold and securities purchased under agreements to repurchase)/total assets,
commercial and industrial loans/total loans, doubtful loans/total capital, equity capital/total assets, (nance agriculture
loans + farmers loans + real estate loans secured by farmland)/total assets, loans believed to be uncollectable/total capital,
loans to individuals for household, family and other personal expenditure/total loans, net income/equity capital, ROA, real
estate loans secured by 14 family residential properties/total loans, real estate loans secured by non-farm non-residential
properties/total loans, substandard loans/total capital, total time and savings deposits/total deposits, total assets, total interest
paid on deposits/total deposits, total loans/(equity capital + reserve for loan losses), total loans/savings, total operating
expenses/total assets
[121] EBIT/total assets, market value of equity/total debt, retained earnings/total assets, sales/total assets, working capital/total
assets
[122] Current liabilities/total debts, exploration expenses/total reserves, net cash ow/total assets, total debt/total assets, trend in
total reserves
[124] Debt/gross cash ow, earnings after abnormals /total assets, payout on operating prot before abnormals and tax, pre-tax
prot/total assets, working capital/total assets
[126] Current ratio, EBIT/total assets, market value of equity/total debt, retained earnings/total assets, sales/total assets, working
capital/total assets
[128] Current ratio, ROA, total debt/total assets

the popular neural network architectures. They
dier in aspects including the type of learning, node
connection mechanism, the training algorithm,
etc. Since, LVQ and Cascor are not very often
used networks, their brief overview is presented as
follows:
LVQ has its origin in vector quantization (VQ),
the main form of competitive learning neural net-
work. In VQ, each of the competitive units corre-
sponds to a cluster center and the error function is
the sum of squared euclidean distance between each
training case and the nearest center. LVQ is used to
Table 3
Other details of each paper
Ref # Bank/rm Source of data/country of origin #Samples Techniques used Timeline of dataset
[1] Firms Korea, KIS (Korea Information Service)* 2400 DA, BPNN, RNN1, RNN2, Hybrid 19941997
I, Hybrid II
[2] Banks USA, FDIC Annual report* 100 CNN, SONN, Fuzzy clustering 1991
[4] Firms Italy 3465 BPNN, LDA 19821992 (1 year)
[5] Firms 111 ZETA analysis 19691975

P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
[6] Firms Spanish 5671 LDA, logit, multi-level perceptron,
Fuzzy rule base
[7] Firms USA 1160 BPNN with novel indicators 3 years
[8] Firms Finnish 74 DA/DA, LA/LA, GA/BPNN, DA/ 19861989
BPNN, LA/BPNN
[9] Firms Korea 662 Auto-associative NN 19942000
[10] Data used by Johnson and Wicherns [50]* LP to quadratic transformation,
QDF
[11] Firms [Standard and Poors COMPUSTAT 237 BPNN, NPDA, logit 19801991
database, Lexis/Nexis, Moodys Industrial
Report, Commerce Clearing Houses Capital
Change Reporting and The Wall Street
Journal, General Council of SEC, CRSP]*
[12] Banks Texas, [FDIC (Federal Deposit Insurance 2067 NN, logit 19851986
Corporation, Shesunho & Co)]*
[13] Firms Data taken from UCI machine learning 37 Fuzzy rough-NN, Fuzzy-NN, crisp-
repository* NN
[14] Firms Data used by Greco et al. [39]* 39 Rough set 1988
[16] Firms Standard and Poors COMPUSTAT 2085 CBR, logit 19751994
database*
[18] Banks Turkish 40 PCA, MDA, logit, probit, IEWS 19942001
(PCA + MDA + logit + Probit)
[19] Banks Belgium, [Chambers of Commerce, CD-Rom 366 MSD (LP + DA), DEA, C5.0 19941996
National Bank of Belgium]*
[24] Firms Standard and Poors COMPUSTAT 150 Loan classication model from OLS 19751976
database* and MDA
[26] Firms Greece, Greek 78 Rough set model using VCR 19801990
[27] Law cases USA 102 BanXupport (IR + CBR)
[29] Firms Data used by Gentry et al. [34] 36 BPNN, logit
[31] Firms Standard and Poors COMPUSTAT 200 RPA, DA 19711981
database*
[36] Firms Data used by Altman [3]* 66 Neuro-fuzzy and rough classiers
[37] Firms Greece, Greek industrial development bank 39 Classical rough set and rough set with 1988
(ETEVA)* dominance relation
[38] Warehouses 12 Rough set approach with order
domains
(continued on next page)

9
Table 3 (continued)

10
Ref # Bank/rm Source of data/country of origin #Samples Techniques used Timeline of dataset
[44] Banks USA, (Federal Financial Institutions 176 Canonical correlation 1987
Examination Council Form 031)*
[45] Firms Data used by Trippi and Turban [111]* 129 Ontogenic NN, DA, Odom & Sharda
method, Back Propagation,
Perceptron, Athena
[46] Several Data used by Liang [68]* FILM, DA, ID3

P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
[47] Firms Korea 542 DA, BPNN, CBR 19911993
[48] Firms Korea 544 CBFS, DA, BPNN 19911993
[51] Firms Australia, [Aspect Financial Pty Ltds 8241 Mixed logit model, MNL 19962003
Financial Analysis Database, DatAnalysis
Database, Huntleys Delisted Company
Database, ASX market Comparative
Analysis, Australian Securities and
Investment Commission (ASIC)]*
[52] Banks Taiwan 24 DA, BPNN 2000
[53] Firms Standard and Poors COMPUSTAT 50 MDA 19721976
database*
[54] Firms Finnish 1500 Euclidean-SOM, Fisher metric-SOM
[55] Firms Finnish, Kera Ltd* 1137 LDA, LVQ, SOM, RBF-SOM, K-
NN
[57] Banks USA 8977 IEWS (using logit), IEWS (using 19891992, 1 and 2 year
Trait recognition)
[62] Firms Standard and Poors COMPUSTAT 282 Cascor, DA 19701989
database*
[63] Firms Standard and Poors COMPUSTAT 34 FLDF, CBLP, MSD, LPC
database* (combined method)
[64] Firms Standard and Poors COMPUSTAT 364 BPNN 19851995 (1, 2 and 3)
database*
[65] Firms Korea, Korean Stock Exchange* 166 MDA, ID3, MDA-assisted BPNN, 19791992
ID3-assisted BPNN, SOFM-assisted
BPNN
[66] Firms South korea, Korean Investors Service 168 BPNN, DA, SOM 19951998 (2, 3)
(KIS)*
[67] Firms Standard and Poors COMPUSTAT 88 MDA, MDA with gray zone, NN 1984 1988 (3)
database* (perceptron)
[69] Firms UK, London Stock Exchange* 1133 Integration methods of DA, logit, 19801999 (1)
Decision tree and BPNN
[70] Firms [Moodys Bond Record, Standard and Poors 921 Recursive partitioning,
Stock Guide, CRSP tapes and Daily Stock bootstrapping, polytomous probit
Price Record]*
[71] Banks USA, US commercial banks of Federal 5700 Logistic regression 19701976
Reserve System*
[73] Firms USA, Compact Disclosure* 200 Rough set model, Recursive 19861988
partitioning model
[74] Firms USA, Compact Disclosure* 291 Rough set, GA, Rough set + GA 19911997
[75] Firms USA, Compact Disclosure* 291 Rough sets, Auditor 19911997
[78] Firms Greece 110 Fuzzy rule generator, LDA, QDA, 5 and 3
logit, probit
[79] Firms Korea, Koreas largest credit guarantee 1888 SVM, LDA, logit, BPNN 20002002
organization*
[80] Firms [1980 Bankruptcy Yearbook and Almanac, 150 ICPB-MSD, LDA, MSD, ICPB-GA 19871995, 3 years

P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
Lexis/Nexis Database, Standard & Poors and GA
COMPUSTAT database]*
[83] Firms [Moodys Manual, Standard & Poors 2163 Logit 19701976
COMPUSTAT database, 10-k nancial
statements]*
[85] Banks Spanish 66 BPNN, logit, MARS, C4.5, DA 19971985
[86] Firms South Korea, Industrial bank of Korea* 2144 AHP-CBR, logit-CBR, weighted- 19951998
KNN, Pure-KNN
[88] Firms [Bankruptcy Yearbook and Almanac, Lexis/ 100 GA-based BPNN, BPNN 19891990
Nexis database]*
[89] Banks and 1. Belgian 2. Texas, Data used by Tam and 182 202 48 BPNN with Feature construction 19871989 19851987 (1 and 2) 1980
Firms Kiang [108]* 3. The data used by Rashad (FC), BPNN without FC
et al. [93]*
[92] Firms Moody Industrial Manuals* 129 BPNN, Athena, Perceptron 19751982
[97] Firms Standard and Poors COMPUSTAT* 301 Isotonic separation, DA, LPD, 19962001 (1, 2 and 3 years)
BPNN, Rough sets and OC1
[98] Firms Federal Home Loan Bank board quarterly 862 BPNN, logit 19861987
tapes*
[100] Firms Moodys Industrial Manuals* 129 SOFM, LDA, MLP, Perceptron, 19751985
Athena.
[101] Firms Moodys Industrial Manuals* 129 DA, BPNN, logit 19751982
[102] Firms South Korea 528 GA 19951997
[106] Banks USA 1741 MDA, BPNN, Regulators 1993
[107] Banks Texas 188 BPNN, Factor logistic, DA, K-NN, 19851987 (2 years)
ID3
[108] Banks Texas 202 LDA, logit, K-NN, ID3, feed 19851987
forward NN, BPNN
[112] Firms UK DataStream and FT Excel company 904 Quadratic interval logistic regression 19851994 (1 year)
Research*
[113] Firms Japan 114 BPNN, DA 19701991
[124] Banks USA 3103 GenSoFNN-CRI (S), MCMAC 19802000
[116] Firms Italy 4738 GA, LDA 19821995
[118] Firms German 6667 GANN, GA, BPNN
[119] Banks USA 1900 FA + logit 19801982
[121] Firms Moodys Industrial Manual* 129 BPNN, DA 19751982
(continued on next page)

11
12 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128

solve classication problems. Each codebook vector

is assigned to one of the target classes. Each class
may have one or more codebook vectors. A case
is classied by nding the nearest codebook vector
and assigning the case to the class corresponding
to the codebook vector (see comp.ai.neural-nets
FAQ, Part 1 of 7: Introduction) [56]. Fahlman
Timeline of dataset

and Lebiere [28] introduced cascade correlation net-

work, which adds units to the network during train-
1980 1991

ing. Such a network is trained for a while. Then,

19841989

19912001

19721978

without altering the existing weights, one or more

new hidden units are added to the network and then
training resumes. The advantages of Cascor over
backpropagation are: (1) automatic determination
CBR (weighted NN, Pure NN), DA

Simple probit, bivariate probit and

of a network topology resulting in good generaliza-

tion (2) training time reduced by orders of magni-
PNN, PNN without pattern

tude and (3) the ability to rene an existing

normalization, FDA, DA

architecture to take into account new data without

beginning the training process all over again [62].
unweighted probit
Techniques used

BPNN, Logistic

2.1.3. Decision trees

Decision trees form a part of machine learning
an important area of articial intelligence [33,91].
A majority of the decision tree algorithms are used
Note: In the third column * indicates source of data and indicates that the data is not available.

for solving classication problems. However, algo-

rithms like CART (classication and regression
trees) can be used for solving regression problems
#Samples

also. All these algorithms induce a binary tree on

1681
122

44
220

the given training data, which in turn results in a

set of ifthen rules. These rules can be used to solve
the classication or regression problem. A number
American and New York Stock Exchanges*

of algorithms are used for building decision tree

including CHAID (Chi squared automatic interac-
tion detection), CART, Quest and C5.0 [94].
Australia, CD Financial Analysis*
Source of data/country of origin

2.1.4. Rough sets

Rough set theory proposed by Pawlak [87] is
based on the assumption that with any object of
the given universe there is some information associ-
ated and objects characterized by similar informa-
tion are indistinguishable or indiscernible. The
indiscernibility relation indicates that we are unable
USA

USA

to deal with single objects but we have to consider

clusters of indiscernible objects or equivalence clas-
ses of the indiscernibility relation. In rough set the-
ory, a pair of precise concepts viz., lower and the
Bank/rm

upper approximations replaces any vague concept.

Table 3 (continued)

Firms

Firms
Firms
Firms

Approximations are two basic operations in the

rough set theory. Rough sets can be applied for
inducing decision rules from data, to solve classi-
Ref #

cation problems. The induced decision rules are cat-

[122]

[123]
[126]
[128]

egorized into exact and possible.

 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
2.1.5. Case-based reasoning
Case-based reasoning (CBR), a branch of arti-
cial intelligence, is intuitively similar to the cognitive
process humans follow in problem solving [58].
When people confront a new problem, they often
depend on past similar experiences and reuse or
modify solutions of these experiences to generate a
possible answer for the problem at hand. The hall-
mark of CBR is its capability to give an explanation
for its decision based on previous cases. Citing rele-
vant previous experiences or cases is a way to justify
a position [58] in human decision-making. Compre-
hensibility of the decision is often crucial in solving
nancial problems. When a company is identied as
failing, CBR can give examples of similar compa-
nies that failed in the past as a justication for its
prediction. The heart of the CBR is the nearest
neighbour algorithm [96].
2.1.6. Support vector machines
Support vector machines (SVM) introduced by
Vapnik [115] use a linear model to implement non-
linear class boundaries by mapping input vectors
nonlinearly into a high-dimensional feature space.
In the new space, an optimal separating hyperplane
(OSH) is constructed. The training examples that
are closest to the maximum margin hyperplane are
called support vectors. All other training examples
are irrelevant for dening the binary class bound-
aries [22,115]. SVM is simple enough to be analyzed
mathematically. In this sense, SVM may serve as a
promising alternative combining the strengths of
conventional statistical methods that are more
theory-driven and easy to analyze and machine
learning methods that are more data-driven, distri-
bution-free and robust. Recently, the SVM has been
used to nancial applications such as credit rating,
time series prediction and insurance claim fraud
detection. These studies reported that SVM was
comparable to and even outperformed other classi-
ers including BPNN, CBR, MDA and logit in
terms of generalization performance.
2.1.7. Data envelopment analysis
Data envelopment analysis (DEA) is a non-para-
metric performance assessment methodology intro-
duced by Cooper et al. [21] to measure the relative
eciencies of organizational or decision-making
units (DMUs). The DEA applies linear program-
ming to observing inputs consumed and outputs
produced by decision-making units and con-
structs an ecient production frontier based on best
13
practices. Each DMUs eciency is then measured
relative to this frontier. In other words, DEA
assesses the eciency of each DMU relative to all
the DMUs in the sample, including itself. This rela-
tive eciency is calculated by obtaining the ratio of
the weighted sum of all outputs and the weighted
sum of all inputs. The weights are selected so as to
achieve Pareto optimality for each DMU. An
appealing aspect of DEA is that it does not require
price or cost data. Also, the DEA is invariant to
scaling of variables. The DEA helps to identify inef-
cient DMUs as well and amounts of ineciency of
inputs and/or outputs.
2.1.8. Soft computing
The paradigm of soft computing or computational
intelligence refers to the seamless integration of dif-
ferent, seemingly unrelated, intelligent technologies
such as fuzzy logic, neural networks, genetic algo-
rithms, machine learning (case-based reasoning
and decision trees subsumed), rough set theory
and probabilistic reasoning in various permutations
and combinations to exploit their strengths. This
term was coined by Zadeh [125] in the early 1990s
to distinguish these technologies from the conven-
tional hard computing that is inspired by the
mathematical methodologies of the physical sci-
ences and focused upon precision, certainty and
rigor, leaving little room for modeling error, judg-
ment, ambiguity, or compromise. In contrast, soft
computing is driven by the idea that the gains
achieved by precision and certainty are frequently
not justied by their costs, whereas the inexact com-
putation, heuristic reasoning and subjective decision
making performed by human minds are adequate
and sometimes superior for practical purposes in
many contexts. Soft computing views the human
mind as a role model and builds upon a mathemat-
ical formalization of the cognitive processes those
humans take for granted [125]. Within the soft com-
puting paradigm, the predominant reason for the
hybridization of intelligent technologies is that they
are found to be complementary rather than compet-
itive in several aspects such as eciency, fault and
imprecision tolerance and learning from example
[125]. Further, the resulting hybrid architectures
tend to minimize the disadvantages of the individual
technologies while maximizing their advantages.
Some of the soft computing architectures employed
are neurofuzzy, fuzzyneural, neurogenetic,
geneticfuzzy, neurofuzzygenetic, roughneuro,
14 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
etc. Multi-classication systems or ensemble classi-
ers are also treated as soft computing systems.
3. Statistical techniques
Altman et al. [5] developed a new bankruptcy
classication model called Zeta analysis, which
incorporated comprehensive inputs. The data sam-
ple consists of 111 rms with seven variables each.
They found that the ZETA model outperformed
alternative methods in terms of expected cost crite-
ria. Classication accuracy of this model ranged
from 96% for one period prior to bankruptcy to
70% for ve periods prior to bankruptcy. Martin
[71] presented logistic regression to predict proba-
bility of failure of banks based on the data
obtained from the Federal Reserve System, data
sample. Ohlson [83] employed the logit model to
predict rm failure. The data was obtained from
Moodys Manual, Compustat data tapes and 10-
K nancial statements. The classication accuracy
reported by him was 96.12%, 95.55% and 92.84%
for prediction within one year, two years and one
or two years respectively. Dietrich and Kaplan
[24] developed a simple three-variable linear model
to classify loan risks. He compared his model with
(i) Altman model and (ii) Wilcox bankruptcy pre-
diction [120] model and got better performance
over them. They used six independent variables
and one dependent variable suggested by individual
experts. The model gave better accuracy than previ-
ous bankruptcy models in predicting the riskiness
of loan.
Zmijewski [128] examined two estimation biases
for nancial distress models on non-random
samples. The rst bias results from oversampling
distressed rms and falls under the topic of choice-
based sample biases. The second results from using
a complete data sample selection criterion and
falls under the topic of sample selection biases.
The data used in the study was obtained from the
American and New York Stock Exchanges. The
data set consisted of estimation sample of 40 bank-
rupt and 800 non-bankrupt rms and a prediction
sample of 41 bankrupt and 800 non-bankrupt rms.
The choice-based sample was examined using
unweighted probit and weighted exogenous sample
maximum likelihood. The sample selection bias
issue was examined using simple probit and bivari-
ate probit assessment. West [119] used the factor
analysis to create composite variables to describe
banks nancial and operating characteristics. Data
was taken from Call & Income reports and exami-
nation reports for 1900 commercial banks in some
states of USA. He demonstrated that his combined
method of factor analysis and logit estimation was
promising in evaluating banks condition. Karels
and Prakash [53] conducted a study in a threefold
manner; (i) Investigated the normality condition of
nancial ratios required by the MDA technique;
(ii) when these ratios are non-normal, they con-
structed ratios which are either multivariate normal
or almost normal; (iii) using these ratios to compare
the prediction results of DA with that of other stud-
ies. They used a random sample of 50 companies
obtained from the COMPUSTAT data tapes. They
reported 96% classication rate for non-bankrupt
rms and 54.5% for bankrupt rms.
Haslem et al. [44] determined the implication of
the foreign and domestic strategies reected in the
balance sheets of US commercial banks. Also, they
determined the impact of strategies on the prot-
ability performance. For the analysis, they used
the 1987 balance sheet data from the call reports
of 176 large US banks having both foreign and
domestic oces. They used canonical correlation
analysis to analyze balance sheet for the large and
very large bank samples and generated canonical
variate scores. Kolari et al. [57] developed early
warning system (EWS) based on logit analysis and
Trait recognition for large US banks. The logit
model correctly classied over 96% of the banks 1
year prior to failure and 95% of the banks 2 year
prior to failure. For developing trait recognition
model, they used half of the original sample.
Because of this reduction in the sample size it has
disadvantages over logit model. In both 1 year
and 2 year prior to failure data classication accu-
racy of trait model was 100%. It was concluded that
trait recognition outperformed logit model in terms
of type-I and type-II errors.
Recently, Jones and Hensher [51] presented
mixed logit model for rm distress prediction and
compared it with multinomial logit models
(MNL). They modeled nancial distress problem
in three states viz., state 0: non-failed rms; state
1: insolvent rms, state 2: rms which led for bank-
ruptcy. They developed two samples for model esti-
mation and validation. The results are too detailed
to present here. They concluded that mixed logit
obtained substantially better predictive accuracy
than multinomial logit models. Canbas et al. [18]
proposed an integrated early warning system
(IEWS) by combining DA, logistic regression, pro-
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
bit and principal component analysis (PCA), that
helped in examination and detection of banks with
serious problems. PCA explored three nancial
components, which signicantly explained the
changes in the nancial condition of banks. With
these three factors they employed DA, logistic
regression and probit models. Then, by combining
all these together they constructed an IEWS. They
used the data of Turkish banks available in website
(http://www.tbb.org.tr/english/bulten/yillik/2000/
ratios.xls). The results are too elaborate to present
here. They concluded that IEWS has more predic-
tive ability than other models.
4. Neural networks
This section reviews the papers where dierent
topologies of neural networks (NN) are proposed
and compared with other techniques. This section
is split into three sub sections covering the applica-
tions of (i) back propagation trained NN (BPNN),
(ii) self-organizing feature map (SOM) and (iii)
other NN topologies such as probabilistic NN, auto
associative NN and cascade correlation NN.
4.1. Back propagation trained neural network
(BPNN)
Tam [107] employed BPNN for bankruptcy pre-
diction. Data were obtained from Texas banks, one
year and two years prior to failure. He selected the
variables based on CAMEL criteria of FDIC. He
showed that BPNN oered better predictive accu-
racy than other methods viz., DA, factor-logistic,
K-nearest neighbour (K-NN) and ID3 [77]. Tam
and Kiang [108] compared the performance of (i)
LDA, (ii) logistic regression, (iii) K-NN, (iv) ID3,
(v) feedforward NN (net0) and (vi) BPNN (net10)
on bankruptcy prediction problems. BPNN outper-
formed other techniques for one-year prior training
sample, whereas for two-year prior training sample
DA outperformed others. However, BPNN outper-
formed others in both the one-year prior and the
two-year prior holdout samples. In jackknife
method [61] also, BPNN outperformed others in
both the one-year prior and the two-year prior hold-
out samples. So, with the evidence of jackknife
method, they concluded that NN outperformed
the DA methods.
Salchenberger et al. [98] presented a BPNN
to predict the probability of failure for savings
and loan associations (S&Ls). They compared its
15
performance with a logistic model. They considered
29 variables from the CAMEL categories and per-
formed stepwise regression that identied ve vari-
ables. Results are too detailed to present here.
They concluded that BPNN outperformed logistic
regression. Sharda and Wilson [101] compared the
BPNN with MDA based on resampling technique.
They used Altmans ve variables. They used
BPNN with ve input nodes, 10 hidden nodes and
two output nodes. They concluded that BPNN out-
performed DA in all cases. Fletcher and Goss [29]
used the BPNN for predicting bankruptcy of rms
and compared it with logistic regression. They
employed v-fold cross-validation technique. The
data of 36 companies was drawn from Gentry
et al. [34]. They used three independent variables.
BPNN prediction performance was 82.4% whereas
logistic regression produced only 77%. Altman
et al. [4] compared the performance of LDA with
BPNN in distress classication. They used 10 nan-
cial ratios. The data sample consisted of three types
of rms viz., (i) healthy, (ii) unsound and (iii) vul-
nerable. Three sample data sets were used for this
study. They obtained best results with BPNN hav-
ing three layers: initial hidden layer of 10 neurons,
second hidden layer with four neurons and an out-
put layer of one neuron. They concluded that
LDA marginally outperformed BPNN.
Wilson and Sharda [121] compared the predictive
accuracy of BPNN with that of DA. They used Alt-
man [3] variables. They concluded that BPNN out-
performed other methods over all test samples.
Tsukuda and Baba [113] performed the prediction
of bankruptcy using BPNN with one hidden layer
and concluded that BPNN outperformed the DA.
Leshno and Spector [67] compared various NN
models and DA and explained their prediction
capabilities in terms of data span, learning tech-
nique and number of iterations. This study used
the perceptron like network for input features of
two types viz., (i) functional expansion (FE), (ii)
joint activation (JA) and investigated their eect
on generalization. They used 41 nancial ratios
including Altman [3] variables. They concluded that
NN outperformed the Z-score model. Rahimian
et al. [92] compared the performance of (i) BPNN,
(ii) Athena, an entropy-based neural network and
(iii) single layer perceptron on the bankruptcy pre-
diction problem. They compared them with Odom
and Shardas [82] BPNN and discriminant analysis
also. The accuracies obtained on the test data were
(i) discriminant analysis produced 74.54%, (ii)
16 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
Odom and Shardas test produced 81.81%, (iii)
Athena yeilded 81.81%, (iv) perceptron yielded
81.81% and (v) BPNN produced 81.81%. The
BPNN implemented in this study outperformed
Odom and Shardas [82] BPNN in terms of speed.
Barniv et al. [11] compared BPNN, multi-state
ordered logit and non-parametric multiple discrimi-
nant analysis (NPDA). They developed a model for
classifying rms into three states viz. acquired,
emerging and liquidated. They designed two models
viz., (i) twelve variable model and (ii) ve variable
model. These two models outperformed Ohlsons
[83] nine variable model. They concluded that
BPNN outperformed NPDA and logit models. Bell
[12] compared logistic regression and BPNN in pre-
dicting bank failures. In this study, he used 28 can-
didate predictor variables. The architecture of
BPNN was 12 input nodes, six hidden nodes and
one output node. He concluded that neither the
logit nor the BPNN model dominated the other in
terms of predictive ability. But, for complex decision
processes BPNN was found to be better.
Piramuthu et al. [89] designed a method called
feature construction (FC) and used it with BPNN
for bankruptcy prediction. They used the Belgian
Bankruptcy data of 182 banks, Tam and Kiang
[108] data and Rashid and EI-Sheshai [93] data of
48 banks. They concluded that BPNN with FC out-
performed the plain BPNN in all datasets. Zhang
et al. [126] used generalized reducing gradient
(GRG2) trained three-layered NN for bankruptcy
prediction. They used v-fold cross-validation tech-
nique for testing. They reported that overall classi-
cation rates of GRG2 trained NN ranged from
77.27% to 84.09% whereas that for logistic regres-
sion ranged from 75% to 81.82%. They concluded
that GRG2 trained NN outperformed logistic
regression. Atiya [7] reviewed the applications of
NN in bankruptcy prediction and developed an
NN. He developed novel indicators for the NN, tak-
ing cue from Merton [76]. For the study he collected
data from defaulted and solvent US rms. He
reported a prediction accuracy of 84.52% for the
in-sample set and 81.46% for the out-of-sample
set. He showed that the use of the indicators in addi-
tion to nancial ratios provided signicant
improvement.
Swicegood and Clark [106] compared DA,
BPNN and human judgment in predicting bank fail-
ures. The variables were taken from the bank call
reports. Overall, MDA model correctly classied
86.4% and 79.5% of regional and community banks
respectively. However, BPNN model correctly clas-
sied 81.4% and 78.25% of regional and community
banks. They concluded that BPNN outperformed
other two models in identifying under performance
banks. Lam [64] integrated fundamental and techni-
cal analysis in BPNN for nancial performance pre-
diction. The predictors included 16 nancial and 11
macroeconomic variables. She concluded that
BPNN signicantly outperformed the minimum
benchmark based on highly diversied investment
strategy. Also, incorporation of previous years
nancial data in the input vector for BPNN could
signicantly increase the return level, thereby, dem-
onstrating the benets of integrating fundamental
analysis with technical analysis via BPNN. She also
extracted rules from trained neural network and
found that they outperformed the neural networks
per se. Further, they performed as accurately as
the maximum benchmark. Lee et al. [66] compared
BPNN with self-organizing feature map (SOM),
DA and logistic regressions. The data sample con-
sisted of 168 Korean rms taken from the Security
and Exchange Commission (SEC) lings stored in
an on-line database of the Korea Investors Service
(KIS) Inc. (www.kisrating.com). The fourfold
cross-validation testing was used for all the models.
The results are too detailed to present here. They
concluded that the BPNN outperformed the all
other techniques.
4.2. Self-organizing maps (SOM)
Lee et al. [65] proposed three hybrid BPNN viz.,
(i) MDA-assisted BPNN (ii) ID3-assisted BPNN
and (iii) SOM-assisted BPNN for predicting bank-
ruptcy in rms. The data of 166 rms is taken from
the Korea Stock exchange. They selected 57 nan-
cial variables. They concluded that hybrid neural
network models performed better than MDA and
ID3. Serrano-Cinca [100] compared the perfor-
mance of SOM with LDA and BPNN in nancial
diagnosis. The data set consisted of Altmans [3]
variables. The architecture of SOM used was 4 input
nodes and 144 output nodes arranged in a 12 12
square grid in order to accommodate 74 patterns
in data sample. He proposed two hybrid neural sys-
tems viz., (i) a combination of LDA with SOM,
where LDA calculated the Z-score for each rm,
which was superimposed onto SOM to obtain iso-
solvent regions, (ii) a combination of BPNN with
SOM. The LDA obtained 74.5%, while other mod-
els such as Rahimian et al.s MLP [92], Odom and
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
Shardas MLP [82], Perceptron model, Athena
Model and his own MLP obtained 81.8%. The pro-
posed system outscored Z-score analysis in provid-
ing intuitive visual graphics that give information
on the risk of bankruptcy, the nancial characteris-
tics of rm and that type of rm it is similar to.
Kiviluoto [55] used SOM and proposed its variants
for rm bankruptcy prediction. He compared three
dierent SOM-based classiers viz., SOM-1, SOM-2
and RBF-SOM hybrid with LDA, learning vector
quantization (LVQ) and K-NN. The parameters
for each classier were determined using v-fold
cross-validation technique. He modied the LVQ
algorithm to accommodate the NeymanPearson
classication criteria. This NeymanPearson LVQ
not only speeded up the convergence but also
increased the classication accuracy. He used the
data segment from Kera Ltds customer companies
for the study. He concluded that NeymanPearson
LVQ is more useful than one minimizing the total
number of misclassications. He concluded that
other classiers outperformed SOM-1. He also con-
cluded that RBF-SOM performed slightly better
than other classiers. Kaski et al. [54] introduced
Fisher information matrix based metric and imple-
mented SOM with it. They used the new method
to understand the non-linear dependencies between
bankruptcies and nancial indicators. The depen-
dencies were converted into a metric of the input
space and the SOM was used to visualize the
dependencies in a concise form. They obtained 23
nancial indicators from Finnish small and med-
ium-sized enterprises. They computed the accuracy
of SOMs in the Euclidean metric (SOM-E) and in
the Fisher metric (SOM-F) in representing the prob-
ability of bankruptcy, measured by the likelihood of
data at the location of the best matching SOM
units. He concluded that the SOM-F performed bet-
ter than the SOM-E.
4.3. Other neural network topologies
Lacher et al. [62] proposed a cascade-correlation
neural network (Cascor) for classifying nancial
health of a rm. Altmans ve nancial ratios were
used. Data was collected from Standard and Poors
COMPUSTAT nancial database. He compared
the performance of the Cascor model with that of
Altman Z-score model. They concluded that the
Cascor model consistently yielded higher overall
classication rates. Yang et al. [122] proposed
PNN without pattern normalization and Fisher
17
discriminant analysis (FDA) to solve bankruptcy
prediction problem. They compared the original
PNN and PNN without pattern normalization
(PNN*) and FDA with DA and BPNN. The Data
used was taken from Platt et al. [90]. The rst four
ratios were deated to remove the dierences in
ratio values over time caused by uctuations in
related factors. The results are too detailed to pres-
ent here. They concluded that the PNN* and BPNN
with non-deated data achieved better classication
rates. FDA produced better classication results
with deated data. They found that deation
improved the discrimination ability of some of the
prediction models as observed in [90]. Baek and
Cho [9] proposed the auto-associative neural net-
work (AANN) for Korean rm bankruptcy predic-
tion. They trained the AANN with only solvent
rms data. Then they applied the test data contain-
ing both solvent and insolvent rms. So, any solvent
rm data that shared common characteristics with
the training data resulted in small error at the out-
put layer while the bankrupt rms data resulted in
a large error at the output layer. AANN yielded
classication rates of 80.45% for solvent and
50.6% for defaulted rms. However, the 2-class
BPNN produced classication rates of 79.26% for
solvent and 24.1% for defaulted rms. Therefore,
they concluded that AANN outperformed 2-class
BPNN.
5. Case-based reasoning techniques
Bryant [16] designed a CBR system for bank-
ruptcy prediction. He compared it with Ohlsons
[83] logit model. CBR cluster trees were created with
three case libraries viz., model-I, model-II and
model-III. They consisted of 25 nancial variables
for one year, two year and three years data. The
results reported by him are too elaborate to mention
here. He concluded that logit outperformed CBR in
terms of less Type-I accuracy. Jo et al. [47] used
MDA, CBR and BPNN to predict bankruptcy.
They considered the data taken from Korean rms.
Variables were selected using the dimension reduc-
tion techniques such as stepwise selection and t-test.
The average hit ratio of DA, BPNN and CBR was
82.22%, 83.79% and 81.52%, respectively. They con-
cluded that BPNN outperformed DA and CBR and
DA outperformed CBR. Park and Han [86] pro-
posed analytic reasoning model called the K-NN
with analytic hierarchy process (AHP) feature
weight approach for bankruptcy prediction. They
18 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
proposed CBR for indexing and retrieving similar
cases. The AHP-weighted K-NN was compared
with pure K-NN algorithm. For this study, they
used the data obtained from Industrial Bank of
Korea. They used both nancial and non-nancial
variables. The classication accuracy of pure K-
NN approach was 68.3% whereas the hybrids
Logit-CBR and AHP-K-NN-CBR produced
79.2% and 83.0%, respectively. They concluded that
weighted K-NN hybrid model outperformed other
models.
Yip [123] used CBR with K-NN to predict Aus-
tralian rm business failure. She used the statistical
evaluations for assigning the relevancy of attributes
in the retrieval phase of algorithm. She compared
the performance of CBR + K-NN with that of
DA. The overall accuracy of CBR with weighted
K-NN, CBR with pure K-NN and DA were
90.9%, 79.5% and 86.4%, respectively. She con-
cluded that CBR with weighted K-NN was better
than DA.
6. Decision trees
In this section, we review the works reported on
the application of decision trees. Decision trees use
recursive partitioning algorithm to induce rules on
a given data set. Marais et al. [70] proposed recur-
sive partitioning algorithm (RPA) for predicting
bankruptcy in rms. They used (i) recursive parti-
tioning technique and (ii) bootstrapping. They
applied polytomous probit and recursive partition-
ing to the data sample. The results reported are
too detailed results to be presented here. However,
it can be inferred that when all the variables were
used, polytomous probit outperformed recursive
partitioning in terms of expected misclassication
rates in both resubstitution and bootstrap methods.
Frydman et al. [31] presented the application of
RPA to bankruptcy prediction and compared it
with the DA and the analysis was carried out for
misclassication cost of C12 ranging from 1 to 70,
where C12 denotes the cost of misclassifying sample
belonging to group 1 to group 2. They constructed
two variants of discriminant functions viz., DA1
and DA2 and compared them with two RPA mod-
els viz., (i) RPA1 with relatively complex tree and
(ii) RPA2 with smallest v-fold cross-validation risk.
RPA1 model outperformed DA1 and DA2 models
for all costs. Also, RPA2 tree turned out to be sub
tree of RPA1 tree for every cost. They showed that
RPA2 had larger resubstitution risk.
7. Evolutionary approaches
Varetto [116] employed a genetic algorithm (GA)
for bankruptcy prediction and compared its perfor-
mance with that of LDA. He conducted the study
for: (i) one year prior to bankruptcy data and (ii)
three years prior to bankruptcy data. He reported
that for case (i), the genetic linear function yielded
92% classication rate for bankrupt companies and
LDA yielded 90.1%. However, in case (ii), he
observed that LDA outperformed the genetic linear
function in the case of sound companies. He also
inferred that the LDA has a higher stability and gen-
eralization power. Nanda and Pendharkar [80]
incorporated misclassication cost matrix into an
evolutionary classication system. Using simulated
and real-life bankruptcy data, they compared the
proposed method with LDA, a goal programming
and a GA-based classication without the asymmet-
ric misclassication costs. For bankruptcy training
set the classication accuracy of integrated cost pref-
erence based mininized sum of deviations (ICPB-
MSD) and integrated cost preference based GA
(ICPB-GA) outperformed LDA, MSD and GA.
For simulated holdout set the ICPB-GA outper-
formed others. They concluded that the ICPB-
MSD or ICPB-GA might be promising when
compared to traditional MSD or GA. Shin and
Lee [102] also proposed a GA-based approach for
bankruptcy prediction. The rules generated by GA
were easily understood and could be used as expert
systems. Data used contained 528 rms. The ve
rules generated by GA got 80.8% accuracy. They
concluded that GA could successfully learn linear
relationship among input variables.
8. Operational research
Banks and Prakash [10] proposed the linear pro-
gramming heuristic to a quadratic transformation
of data to predict rm bankruptcy prediction. Qua-
dratic discriminant function (QDF) got three mis-
classications whereas Johnson and Wichern [50]
got 46. They concluded that the quadratic transfor-
mation method outperformed the QDF. Lam and
Moy [63] compared dierent DA methods and pro-
posed the their combination to predict the classica-
tion of new observations. For testing this hybrid
technique, they used simulation experiment. Dis-
criminant analyses taken for this study were FLDF
(Fisher linear discriminant analysis), cluster-based
LP (CBLP) and MSD (minimized sum of devia-
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
tions). Their simulation generated data from con-
taminated multivariate normal distribution for the
rst 24 cases and for remaining 10 cases contained
non-contaminated data to test the robustness of
LPC, which combined classication results of dier-
ent DA. Their combined method outperformed
other DA methods. LPC was reformulated as a
mixed-integer programming model, which mini-
mized weighted number of misclassications. Cielen
et al. [19] compared the performance of minimized
sum of deviations (MSD), data envelopment analy-
sis (DEA) model and a rule induction (C5.0) model
on bankruptcy prediction problem. Here MSD was
a combination of linear programming (LP) and DA.
The dataset was taken from National Bank of
Belgium. The MSD, DEA and C5.0, obtained clas-
sication rates of 78.9%, 86.4% and 85.5% respec-
tively. They concluded that DEA outperformed
C5.0 and MSD model. Kao and Liu [52] formulated
a DEA model for interval data for evaluating the
performance of banks. This study made advance
predictions of the performance of 24 Taiwan banks
based on uncertain nancial data presented in
ranges. They presented the prediction of eciency
scores also in ranges. Among 24 banks, two banks
got the smallest predictive eciency scores of
0.7358 and 0.7584 because these two banks suered
from Asian nancial crisis and had many bad debts.
They showed that DEA predicted the bank perfor-
mance based on their nancial forecasts.
9. Rough sets
Greco et al. [38] proposed a new rough set
approach for solving bankruptcy prediction prob-
lem considering the criteria of attributes with
ordered domains. This approach was similar to
the original rough set analysis in that it used the
approximation of partitioning the objects in some
pre-dened category. However, it employed both
dominance relation and indiscernibility relation.
They represented warehouse making loss with class
CL1 and warehouse making prot with class CL2.
The classical rough set approach got the accuracy
of approximation of 0.6 and 0.7 for CL1 and CL2
respectively and the quality of classication was
0.83. However, the proposed approach got the accu-
racy of approximation of 0.33 and 0.6 for CL1 and
CL2 respectively and the quality of classication
was 0.67. They concluded that the proposed
approach showed improvements over the original
rough set analysis. This improvement be seen by
19
the smaller reduct of {A1, A4} obtained by the pro-
posed approach as against the reduct {A1, A2, A3
and A4} obtained by original rough set analysis
obtained. The decision rules obtained from the pro-
posed approach gave more synthetic representation
of knowledge contained in the information.
Greco et al. [37] presented a new rough set
method based on approximation of a given partition
of set of rms into pre-dened and ordered catego-
ries of risk by means of dominance relation in place
of indiscernibility relation for the evaluation of
bankruptcy in rms. Dominance relation was
proposed in place of indiscernibility relation in
[3943,103]. The classical approach based on indis-
cernibility relation is applied to classication prob-
lems with regular attributes and preferentially
non-ordered decision classes, whereas, the domi-
nance-based rough set approach handles prefer-
ence-ordered domains of attributes (criteria) and
preference-ordered decision classes. The domi-
nance-based rough set approach performs very well
on nancial data. It is also the only data mining
approach handling preference order in data. The
data set was obtained from Greek industrial devel-
opment bank (ETEVA). The data sample was clas-
sied into (i) unacceptable, (ii) uncertainty and (iii)
acceptable. They compared classical rough set with
their proposed method. They showed that the pro-
posed method gave smaller number of reducts than
classical rough set approach based on indiscernibil-
ity. The quality of the approximation obtained by
classical rough set approach and the proposed
method based on dominance were 1 and 0.949
respectively. Also, the decision rules obtained from
the approximation by dominance relation gave a
more synthetic representation of information con-
tained in decision tables. They showed that rules
based on dominance relation are better to sort
new actions than the rules based on indescernibility
relation. Dimitras et al. [26] also used rough set the-
ory for predicting business failures. They used VCR
(valued closeness relation), which prevents major
dierences on one attribute from being compen-
sated by number of minor dierences on other attri-
butes. They used the data collected from large
number of Greek rms. VCR nearest rules correctly
classied 60% of banks not classied by exactly
matching rules. They compared the accuracy of
rough set based approach with DA and logit and
concluded that the rough set approach outper-
formed the other two in revealing the relevant attri-
butes in evaluating the rm failure risk. McKee [73]
20 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
developed a rough set based bankruptcy prediction
model. Rough set analysis produced better results
when the attribute domains for continuous variables
were nite sets of low cardinality. Here, the vari-
ables identied by recursive partitioning method
were used to develop rough set based model which
yielded 88% accuracy in predicting bankruptcy on
a 100-company holdout sample. This was superior
to the original recursive partitioning model, which
was only 65% accurate on the same data set.
Bioch and Popova [14] proposed a modication
of the rough set approach for bankruptcy predic-
tion. They used monotone extensions, decision lists
and dualizations to compute classication rules that
cover the whole space. The dataset used here were
taken from [105]. They computed the monotone
decision trees for the dataset. They concluded that
there was close relationship between the decision
rules obtained using the rough set approach and
the prime implicants of the maximal extension.
McKee [75] compared rough set prediction capabil-
ity with actual auditor signaling rates for US com-
panies. He developed two dierent models with
four variables from the 11 possible variables. These
two models achieved classication accuracy of 61%
and 68% on the validation set. Auditors achieved
classication accuracy of 66%. The model accuracy
rate in this study was signicantly lower than the
one reported in previous studies employing both
rough sets theory and other methods. This was
because the samples employed here were more real-
istic than prior studies.
10. Other techniques
In this section, the papers applying fuzzy tech-
niques, SVM and isotonic separation are reviewed.
Since these techniques found relatively fewer appli-
cations in bankruptcy prediction, all of them are
grouped under this category. Michael et al. [78] pro-
posed fuzzy rule generator method for bankruptcy
prediction and compared it with LDA, QDA, logit
analysis and probit analysis. They used two samples
of data from Greek rms. Fuzzy rule based classier
got 7.48% of type-I error, 44.83% of type-II error
and overall error was 26.16%. The overall classica-
tion error of LDA, logit and probit analysis was
29.35%, 27.15% and 30.63%, respectively. They con-
cluded that fuzzy rule based classier outperformed
other methods. Alam et al. [2] proposed fuzzy clus-
tering for identifying potentially failed banks and
then compared it with two SOM networks viz., (i)
competitive neural network and (ii) SOM. The
results are too detailed to be reported here. They
concluded that both fuzzy clustering and SOM are
good tools in identifying potentially failing banks.
Andres et al. [6] proposed fuzzy rule based classiers
for bankruptcy prediction problem. They compared
the performance of LDA and logistic regression
with multi-layer perceptron and fuzzy-rule based
classiers. They also used Monte Carlo simulation
to measure the eects of sample size variations on
the performance of classiers. The distinctive fea-
tures of this study were: (i) for each classier and
a wide range of sample sizes, average error rates
were estimated from the results of a large number
of Monte Carlo simulations. (ii) The focus was on
business protability analysis, which was not con-
sidered earlier. (iii) Their classication problem
had a low separability degree. (iv) A slight variant
of the class of additive fuzzy systems with Gaussian
membership functions and consequent normalized
to be probabilities was tested. They used the data-
base of commercial and industrial rms located in
Spain. The results are too elaborate to present here.
They concluded that MLP and fuzzy rule based
classier outperformed LDA and logistic regression.
Min and Lee [79] proposed SVM [115] for bank-
ruptcy prediction. He proposed grid-search tech-
nique using vefold cross validation to nd out
the optimal parameter values of kernel function of
SVM. He compared the SVM with MDA, Logit
and BPNN. He used two kernels for SVM viz., (i)
RBF kernel and (ii) polynomial kernel. The classi-
cation rates of MDA, logit, BPNN and SVM for
training data were 78.80%, 79.86%, 85.24% and
88.01%, respectively and for holdout data 79.13%,
78.30%, 82.53% and 83.06%, respectively. They con-
cluded that the SVM outperformed BPNN, MDA
and logit models for the training and holdout data.
Ryu and Yue [97] introduced isotonic separation
for prediction of rm bankruptcy. They compared
isotonic separation with (i) DA, (ii) linear program-
ming discrimination (LPD), (iii) BPNN, (iv) LVQ,
(v) rough set analysis and (vi) oblique decision tree
method (OC1). They used three feature selection
methods viz., (i) backward sequential elimination
(BSE) method with isotonic separation and LP,
(ii) stepwise discriminant analysis (SDA) method
with DA and (iii) mutual information-based
(MIB) method with BPNN. They employed 10-fold
cross validation for testing their method. They con-
cluded that the rough set method was the top per-
former followed by OC1 and LVQ. BPNN,
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
logistic discrimination and probit methods per-
formed worse than others. Results are too detailed
to present here. They concluded that isotonic sepa-
ration outperfomed other methods for short-term
bankruptcy prediction.
11. Soft computing techniques
In this section, papers employing various hybrid
intelligent techniques to solve bankruptcy predic-
tion problem are reviewed. These papers developed
new hybrid systems combining the intelligent tech-
niques and sometimes some proven statistical mod-
els. Three varieties of soft computing architectures
have been employed so far: (i) ensemble classier
[96], where techniques such as BPNN, DA, logistic
regression, MARS, C4.5, fuzzy logic, rough set
based approach, GA, GP were employed to solve
the problem in a stand-alone mode and then their
results are combined through an arbitrator which
performs simple majority voting or weighted major-
ity voting schemes or a linear combination of pre-
dictions; (ii) an intelligent technique is used for
feature selection task and another intelligent tech-
nique performs classication by taking the selected
features and (iii) tightly integrated hybrid systems
such as GA trained NN, neuro-fuzzy, GA-neuro-
fuzzy, etc. The papers reviewed in this section
employed one of these three architectures.
Back et al. [8] developed a hybrid architecture
where LDA, logit and GA take care of feature selec-
tion and the selected features were used as predic-
tors for BPNN in bankruptcy prediction. The data
consisted of the annual nancial statements of Finn-
ish companies. They employed ve hybrid models
viz., (i) DA used for feature selection + DA used
for prediction, (ii) logit used for feature selec-
tion + logit used for prediction, (iii) DA used for
feature selection + BPNN used for prediction, (iv)
logit used for feature selection + BPNN used for
prediction and (v) GA used for feature selec-
tion + BPNN used for prediction. They concluded
that BPNN and model (v) got improved results than
models (iii) and (iv). Ignizio and Soltys [45] pre-
sented a GA-based approach for the simultaneous
design and training of neural networks for rm fail-
ure prediction. They called hybrid neural network
as ontogenic NN. The data taken from [92] con-
sisted of ve variables. They inferred that the hybrid
obtained less number of misclassied cases com-
pared to other methods. Wallrafen et al. [118] stud-
ied the Genetic algorithm-neural network hybrid
21
(GANN), where dierent parameters of NN such
as topology, connection weights and input variables
selection were encoded. They used the data of Ger-
man corporations. The performance of GANN was
compared on the basis of the Type-II error, while
the costlier Type-I error was kept constant. Using
all input variables, BPNN achieved a Type-II error
of 44.2% on the test sample. The genetic algorithm
reduced the Type-II error from 42.6% to 36.1%.
Optimized GANN achieved Type-II error of
46.6% on validation set due to over selection
eect. Optimized neural network did not outper-
form earlier solutions on the validation set.
Jo and Han [48] designed a new architecture by
hybridizing case-based forecasting (CBFS), BPNN
and DA, which achieved higher prediction accuracy
than these individual models operated in stand-
alone mode. Three types of data viz., training,
testing and generalization, collected from Korean
companies, were used. The proposed hybrid intelli-
gent system comprised a linear combination of the
following ve models viz., (i) DA, (ii) BPNN1
(which is BPNN with one hidden layer), (iii)
BPNN2 (which is BPNN with two hidden layers),
(iv) CBFS1 (which uses a similarity measure to
determine the number of base cases) and (v) CBFS2
(which uses all the base cases). They performed
numerical experiments with dierent weights for
the ve models. The best combination of weights
was found to be (2, 3, 5, 1 and 4) with prediction
accuracy of 90.78% for data set-I and (1, 5, 4, 2
and 3) with prediction accuracy of 89.72% for data
set-II. Hit ratio of integrated model using equal
weights for the output of the ve models was
89.36%.
Jeng et al. [46] presented a fuzzy inductive learn-
ing method (FILM) that integrated fuzzy set theory
with regular inductive learning process for predic-
tion. They compared the FILM with DA and ID3.
Bankruptcy dataset was taken from [68]. The pre-
diction accuracy of FILM, DA and ID3 was
83.3%, 76.7% and 70%, respectively. Thus they con-
cluded that FILM outperformed both DA and ID3
in the case of bankruptcy data. Olmeda and Fernan-
dez [85] compared the accuracy of classiers in
stand-alone mode, on bankruptcy prediction prob-
lem. They also developed a hybrid system integrat-
ing them. They proposed a framework to
formulate the choice of the optimal mixture of the
technologies as an optimization problem and solved
it using a genetic algorithm. For the optimal struc-
ture, they used v-fold cross-validation technique.
22 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
Data for this study was obtained from Spanish
banking system. For the models combined by a
compensating aggregation method they employed
the dataset used in Odom and Sharda [82]. BPNN
performed the best followed by logit, MARS, C4.5
and DA in that order. They combined models in
two ways: (i) by simple voting scheme and (ii)
by a compensation aggregation method. Overall
prediction rates yielded by combined models
viz., NN + logit + C4.5 + DA, NN + logit + C4.5,
NN + logit + MARS + DA, NN + logit, NN + lo-
git + C4.5 + MARS, NN + logit + DA, NN, all
methods and NN + logit + MARS by simple voting
scheme were 96.21%, 94.94%, 94.69%, 93.93%,
93.18%, 92.42%, 92.42%, 91.66% and 90.91%,
respectively. They suggested that BPNN model
was superior to both classical and new statistical
and machine learning classiers. They found that
hybrid methods by simple voting gave more accu-
rate predictions than the stand-alone methods.
Gorzalczany and Piasta [36] presented two dier-
ent hybrid intelligent decision support systems viz.,
(i) neuro-fuzzy classier (N-FC) and (ii) rough clas-
sier (RC) for rm bankruptcy prediction. RC was
a combination of rough set based rule induction sys-
tem and statistical techniques. They used Altmans
[3] data in this study. Leave-one-out method was
employed to test the models. Classication accura-
cies of N-FC (with 10 hidden nodes), RC (generated
by ProbRough), C4.5 and CN2 on corporate bank-
ruptcy data were 97%, 90.4%, 84.8% and 86.4%,
respectively. They concluded that N-FC outper-
formed other techniques. Elhadi [27] presented a
hybrid system integrating information retrieval
(IR) and CBR for legal domain of bankruptcy
law. He designed an IR-CBR bankruptcy support
system (BanXupport). Each case was related to a
bankruptcy law section. BanXupport currently
had three clusters corresponding to the three most
important sub-sections viz., Stay, exemption and
preferences. Knowledge in the system was repre-
sented in two ways: IR based and CBR based. Val-
idation of the system was done in two ways: rst
check the ability of the IR components in selecting
categories and then check the ability of the CBR
system in selecting the most similar instances. The
overall accuracy by TDV (term discrimination val-
ues) an SS (statue-seeded automatic indexing and
retrieval approach) based on 71-case set was 85%
and 95%, respectively. When using the textbook
set of 31 cases on the SS component, the system
could correctly classify 87% of cases. He ran rst
set of 71-cases on the CBR component of the system
after being pre-classied using SS. Classication
values ranged from 16% to 97% for exemption,
40% to 93% for preference and 15 to 93% for stay.
They showed that BanXupport matched cases based
on the selected terms and provided a numerical
measure to test the level of similarity to each sec-
tion. They concluded that the BanXupport sug-
gested relevant cases with a similarity measure.
Ahn et al. [1] proposed hybrid models combining
rough sets and BPNN for Korean rm failure pre-
diction and compared it with stand-alone BPNN
and DA. They used (i) BPNN (ii) BPNN trained
with horizontally reduced information system
(RNN1) meaning that the feature selection was per-
formed before training the NN and (iii) BPNN
trained with horizontally and vertically reduced
information system (RNN2) meaning that feature
selection and sample size reduction were carried
out before training NN. The architecture chosen
for BPNN was eight input nodes, ve hidden nodes
and one output node (reported as 8-5-1), while for
RNN1 and RNN2 4-3-1 architecture was used.
They employed 12-fold cross-validation technique
in testing phase. They constructed two hybrid mod-
els (i) hybrid model I combining rough sets with
RNN1, (ii) hybrid model II combining rough sets
with RNN2. The average prediction accuracy of
DA, BPNN, RNN1, RNN2, Hybrid I and Hybrid
II were 78.75%, 84.62%, 89.5%, 89.79%, 94.3%
and 94.34%, respectively. They inferred that hybrid
models I and II outperformed both BPNN and
DA.
Lin and McClean [69] developed hybrid models
integrating BPNN, a decision tree (C5.0), DA and
logistic regression in dierent combinations for pre-
dicting corporate failures in UK. They selected the
variables using two feature selection methods viz.,
(i) nancial theory and human judgment (ii)
ANOVA. They compared the performance of DA,
logistic regression, C5.0 and BPNN. Prediction
accuracy of DA using rst feature selection method
was 78.6%, whereas DA with second feature selec-
tion method produced 77.4%. Prediction accuracy
of logistic regression using rst feature selection
method was 84%, whereas logistic regression using
second feature selection method yielded 84.6%. Pre-
diction accuracy of BPNN using rst feature selec-
tion method was 87.5%, whereas using BPNN
with second feature selection method yielded
88.1%. They also proposed some other hybrid mod-
els viz., (i) Hybrid 1 DA + logistic regres-
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
sion + NN + C5.0, (ii) Hybrid 2 DA + NN +
C5.0, (iii) Hybrid 3 logistic regression + C5.0.
Using the rst feature selection method the predic-
tion accuracy of Hybrids 1, 2 and 3 was 88.4%,
88.1% and 88.1%, respectively. However, using sec-
ond feature selection method the prediction accu-
racy of Hybrids 1, 2 and 3 was 89.6%, 89.6% and
89.3%. They concluded that ANOVA performed
better than human judgment except for DA and
that the BPNN and C5.0 outperformed statistical
approaches. They also concluded that hybrid model
produced better results.
McKee and Lensberg [74] presented a hybrid
approach to bankruptcy prediction by integrating
a rough set model with genetic programming
(GP). They suggested a two-stage hybrid model:
stage 1 used a rough set model in Ref. [74] to iden-
tify subsets of important explanatory variables and
stage 2 comprised a GP algorithm in Ref. [59] to
develop a structural model of bankruptcy based
on those variables. Rough set model yielded 100%
classication accuracy on training set and 67% on
validation set. The GP model obtained 82.6% accu-
racy on the training set and 80.3% on the validation
set. This was signicantly higher than the accuracy
achieved by the rough set model. The type I and
type II errors were analyzed using second genetic
model. New model was trained using the same GP
algorithm, except that the validation sample of rst
GP model was used as the training data for second
GP model. These two models yielded 81% and 83%
accuracies respectively over the entire sample. They
concluded that the GP approach coupled with
rough sets could be ecient approach for bank-
ruptcy prediction problem.
Bian et al. [13] proposed a new fuzzy-rough-near-
est neighbour hybrid for bankruptcy prediction.
They compared it with crisp K-NN and fuzzy
K-NN. Fuzzy-rough K-NN provided better results
in identifying the non-protable companies. When
using decision tree feature selection method, fuzzy-
rough K-NN had the lower type I error of 25%.
Overall, they concluded that fuzzy-rough K-NN
performed better in minimizing type I error, while
having satisfactory type II error. Pendharkar and
Rodger [88] studied GA-based ANN on bankruptcy
prediction problem. They chose arithmetic cross-
over operator for the GA-based ANN. They used
real-valued GA to learn the connection weights in
an ANN. They used two datasets of which the rst
one is taken from [49] and second data set was a
real-life data set. They showed that GA-based
23
ANN training showed resistance towards overtting
by keeping the ANN architecture constant. Further,
they concluded that GA-based ANN with 1-point
crossover, arithmetic crossover and uniform cross-
over performed comparably with BPNN on holdout
sample.
Tung et al. [114] proposed a new neural fuzzy
system, viz., the generic self-organizing fuzzy neural
network based on the compositional rule of infer-
ence, GenSoFNN-CRI(S), to predict banking fail-
ure. The interaction between the features was
captured in the form of IF_THEN fuzzy rules.
The GenSoFNN-CRI(S) was compared with the
Coxs proportional hazards model, BPNN and the
modied cerebellar model articulation controller
(MCMAC). They performed v-fold cross-valida-
tion. They concluded that the GenSoFNN-CRI(S)
outperformed Coxs model in minimizing type I
error. However, the GenSoFNN-CRI(S) yielded
higher type II error rate. They observed that the
MLP outperformed both the MCMAC and the
GenSoFNN-CRI(S). Tseng and Lin [112] proposed
a hybrid quadratic interval logistic regression anal-
ysis based on quadratic programming. Their model
combined the advantages of logistic regression and
Tanakas [109] quadratic interval regression model,
a variant of fuzzy regression analysis. They obtained
a classication rate of 78%.
12. Discussion
The following observations can be made from the
current review paper. Table 2, where the nancial
ratios used in each paper were presented, indicates
that a majority of papers considered many nancial
ratios whereas a few of them considered the Alt-
mans variables, which were published in 1968. This
shows that from the domain point of view, the
bankruptcy research has matured considerably as
researchers started attaching more importance to
other nancial ratios as well. Table 3 presents other
dimensions of the review, wherever available. This
table indicates that a vast majority of the studies
reviewed here pertain to rms and not banks. Fur-
ther, majority of the studies are conducted by taking
the data sets relevant to the time period 19802003.
Moreover, for a vast majority of the works, the
country of origin of the data sets is USA followed
by European countries. Further, it is observed that
a variety of statistical and intelligent techniques
have already been applied to the bankruptcy predic-
tion problem.
24 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
The general observation is that the statistical
techniques such as logistic regression, LDA, QDA,
FA were all outperformed by the most popular
NN architecture viz., BPNN, wherever comparisons
were made between these two families of techniques.
This is not surprising because the BPNN with logis-
tic activation function can be thought of as a conu-
ence of several logistic regressions tted together in
parallel. Thus, the non-linearity in the data can be
modeled better by the BPNN. Comparing decision
trees with NN architectures, even in cases where
they yield identical performance, we recommend
the use of decision trees as they produce an impor-
tant by-product viz., ifthen rules. These rules can
be used as an early warning expert system later on.
Depending on the data set, both techniques are
capable of outperforming each other in terms of
accuracy. However, in the case of bankruptcy pre-
diction problems, BPNN outperformed the decision
trees such as C4.5 and ID3 in terms of accuracy.
Further, BPNN, DA and logistic regression outper-
formed the CBR implemented without weights.
Thus, CBR with the simple k-nearest neighbor
method at its heart cannot solve classication prob-
lems with nonlinear boundaries. Also, CBR cannot
generalize well.
Then, rough set based approach outperformed
DA, logistic regression and a decision tree. How-
ever, rough set based approaches can be, in gen-
eral, inaccurate and sensitive to changes in data.
As regards DEA, it yields us only the relative
scores of the eciency levels of the banks. On
the other hand, SVM can be very accurate and
does not have local minima problems unlike
BPNN and it can also be trained with a small
training set. It is observed that SVM outperformed
DA, logistic regression and BPNN. Fuzzy logic
based techniques are least exploited in bankruptcy
prediction research. In the few studies where they
were applied, fuzzy rule based classier outper-
formed LDA and logistic regression, but BPNN
outscored fuzzy rule based classier. More impor-
tantly, fuzzy ifthen rules can be used as early
warning fuzzy expert systems. In general, in the
soft computing architectures, ensemble classiers
outperformed the individual models, which is on
the expected lines. Further, it can be observed that
the interest to design and employ a variety of soft
computing architectures has increased signicantly
over the past decade.
In view of the foregoing and from Tables 2 and
3, the authors noticed a signicant trend in the
bankruptcy prediction research. The interest and
condence in techniques such as fuzzy rule based
classiers, SVM, rough sets, isotonic separation
etc has grown enormously during the past 5
10 years. Statistical techniques are no longer pre-
ferred in view of their low accuracy. Further,
the BPNN is also very much exploited.
Other NN architectures deserve much wider appli-
cation in this eld. However, decision trees such
as CART are not employed as much as they
deserve.
13. Conclusions and future directions
A comprehensive review is conducted on the
research work done during 19682005 in the appli-
cation of statistical and intelligent techniques to
solve the bankruptcy prediction problem in banks
and rms. The review is organized by taking the
type of technique as an important dimension
besides others such as the source of data sets and
variables used and the comparative performance
of techniques in terms of prediction accuracy, wher-
ever available. An important conclusion that can be
drawn from the review is that researchers employed
almost all intelligent techniques to solve this impor-
tant problem. The review indicates that statistical
techniques in stand-alone mode are no longer
employed and among the stand-alone intelligent
techniques, neural networks were the most often
used family followed by rough sets, CBR, OR tech-
niques, evolutionary approaches and other tech-
niques subsuming fuzzy logic, SVM, etc. An
important trend has been to build soft computing
architectures (hybrid intelligent systems) for the
problem. This review supports the popular opinion
that ensemble classiers, by and large, outperform
the individual techniques, that constitute the ensem-
ble classiers. As regards future directions, a lot of
scope still exists in developing new hybrid systems
in various forms for the problem. The full potential
of intelligent techniques such as SVM, fuzzy logic,
collaborative ltering and hitherto unused neural
network architectures such as radial basis function
network, reduced coulomb energy network, gener-
alized regression neural network, counter propaga-
tion neural network, adaptive resonance theory
(ART) network and decision trees such as CART,
TreeNet, random forests can be exploited. Given
the limitations of all intelligent techniques in
stand-alone mode, the authors feel that it is worth-
while to investigate newer soft computing architec-
 P. Ravi Kumar, V. Ravi / European Journal of Operational Research 180 (2007) 128
tures (hybrid intelligent systems) in order to amplify
the advantages of the individual models and mini-
mize their limitations. One such hybrid system
could focus on exploiting the enormous domain
knowledge that is extant for this problem besides
using data-driven modeling. The rst module of
such a hybrid could use the nancial domain
experts experiential knowledge to build a fuzzy
inference system while the second module could
be any of the intelligent techniques such as neural
networks, decision trees, etc.
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