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Outline
Introduction to Neural Networks Neural Networks in Finance Time Series Analysis Stock Market Analysis Capital Budgeting and Risk NN Model for Bankruptcy
Variables Model
Input to Output ratio not 1 to 1 Many interactions between inputs and backward linkages from output to inputs
Added advantage of being able to establish a 'training phase' Can generalize results and lead to logical and unforeseen conclusions through the model
Bond Credit Rating: Assessing Credit Risk of a Corporation using Artificial Neural Networks
Neural Networks
Two Domains :
Recognition Problem Generalization Problem
Both Problems use a trained Neural Network for data set of Input/output Pairs Recognition : Problem of Recognizing output OJ corresponding to input IJ which can be a Noise Corrupted Input. Generalization: Given n pairs of I/O, predicting On+1 for corresponding In+1.
Type of Grades
AAA and AA : High credit quality investment grade AA and BBB: Medium credit Quality Investment BB,B,CCC,CC,C:Low Quality or Junk Bonds D: Bond in default for non-payment of principal and interest
Problem Statement
Let B represent the space of n bonds, B1, B2,. Bn, and R be the set of possible m bond ratings, R1, R2,.. Rm . And Let F represent the k dimensional feature space ,F1, F2,, Fk, describing each bonds then Each bond Bi can be considered as a k-tuple(F1Bi, F2Bi,.., F1Bi ) in the cartesian space F1 x F2 x x Fk. And rating the bonds involves finding the one to one mapping function f such that: f : F 1 x F 2 x x Fk R
E F
G H I J
23.9 44.5
56.8 43.1 67.4 54.9
49.4 60.3
67.5 65.2 81.2 67.4
58.9 65.3
69.7 67.4 87.3 69.1
Results
Neural Network Model consistently outperforms Regression Model in predicting Bond Rating Increasing Number of layers was giving considerable difference in prediction rate except in some cases. Reasons for Better Performance is that Regression Models have Statistical and Mathematical Techniques while in neural networks , model improves itself after every iteration.
References
[1]Martin P. Wallace. Neural Networks and their application to finance. Business Intelligence Journal, July 2008. [2]Marcus D.Odom, Ramesh Sharda. A Neural Network Model for Bankruptcy Prediction. IJCNN International Joint Conference on Neural Networks, 1990. [3]Daniel W. C. Ho, Ping-An Zhang, and Jinhua Xu. Fuzzy Wavelet Networks for Function Learning. IEEE TRANSACTIONS ON FUZZY SYSTEMS, VOL. 9, NO. 1, FEBRUARY 2001 [4] R. Campos, F. J. Ruiz, N. Agell & C. Angulo. Financial credit risk measurement prediction using innovative soft-computing techniques International Conference on Computational Finance & its Applications [5]Dr Clarence N W Tan, PhD. An Artificial Neural Networks Primer with Financial Applications Examples in Financial Distress Predictions and Foreign Exchange Hybrid Trading System. School of Information Technology, Bond University, Gold Coast, QLD 4229,Australia [6]Jun Zhang, Member, IEEE, Gilbert G. Walter, Yubo Miao, and Wan Ngai Wayne Lee, Member, IEEE Wavelet Neural Networks for Function Learning IEEE TRANSACTIONS ON SIGNAL PROCESSING, VOL. 43, NO. 6. JUNE 1995
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