Predicting Bankruptcy using Tabu Search in the Mauritian Context
Throughout this paper, a relatively new technique, the Tabu search variable selection model, is elaborated showing how it can be efficiently applied within the financial world whenever researchers come across the selection of a subset of variables from a whole set of descriptive variables under analysis. In the field of financial prediction, researchers often have to select a subset of variables from a larger set to solve different type of problems such as corporate bankruptcy prediction, personal bankruptcy prediction, mortgage, credit scoring and the Arbitrage Pricing Model (APM). Consequently, to demonstrate how the method operates and to illustrate its usefulness as well as its superiority compared to other commonly used methods, the Tabu search algorithm for variable selection is compared to two main alternative search procedures namely, the stepwise regression and the maximum R 2 improvement method. The Tabu search is then implemented in finance; where it attempts to predict corporate bankruptcy by selecting the most appropriate financial ratios and thus creating its own prediction score equation. In comparison to other methods, mostly the Altman Z-Score model, the Tabu search model produces a higher success rate in predicting correctly the failure of firms or the continuous running of existing entities.
[1] C.E. Mossman, G.G. Bell, L.M. Swartz, and H.Turtle, "An Empirical Comparison of Bankruptcy Models," The Financial Review, Vol. 33, pp.
35-54.1998
[2] B.N. Gibson, "Bankruptcy Prediction: The Hidden Impact of Derivatives", 1998. Available http://www.trinity.edu/rjensen/acct/5341/1998sp/gidson/bankrupt.htm [May 2008].
[3] E. Altman, "Financial Ratios, Discriminant Analysis and The Prediction
of Corporate Bankruptcy," Journal of Finance. Vol. 23 No. 4, pp. 589-
609. 1968
[4] G.L.V. Springate, "Predicting the Possibility of Failure in a Canadian
Firm," M.B.A. Research Project, Simon Fraser University, January
1978. Unpublished.
[5] J.G. Jr. Fulmer, J.E. Moon, T. A.Gavin, , M.J. Erwin, "A Bankruptcy Classification Model for Small Firms," Journal of commercial Bank Lending, pp. 25-7.1984
[6] D.A. Botheras, (1979), "Use of A Business Failure Prediction Model for
Evaluating Potential and Existing Credit Risk," M.B.A. Research
Project, Simon Fraser University, March 1979. Unpublished.
[7] E.G. Sands, "Business Failure Prediction and the Efficient Market
Hypothesis," M.B.A. Research Project, Simon Fraser University,
November 1980. Unpublished
[8] F. Glover, and M. Laguna, "Tabu Search," Kluwer Academic Publishers,
Boston. 1997.
[9] F. Glover, "Future Paths for Integer Programming and Links to Artificial
Intelligence," Computers and Operations Research, Vol. 13, pp. 533-
549. 1986
[10] F. Glover, and M. Laguna, "Tabu Search," 1997 Available http:
//www.dei.unipd.it/~fisch/ricop/tabu_search_glover_laguna.pdf [May
2008].
[11] Z. Drezner, G.A. Marcoulides, G.A and S. Salhi, "Tabu Search Model
Selection in Multiple Regression Analysis," Communications of
Statistics, Vol. 28 No. 2, pp.349-367. 1999
[12] C. A. Anderson, K. Fraughnaugh, M. Parker, and J. Ryan, , "Path
Assignment for Call Routing: An Application of Tabu Search," Annals
of Operations Research, Vol. 41, pp.301-312. 1993
[13] A. L├ÿkketangen, "Tabu Search as a Metaheuristic Guide for
Combinatorial Optimisation Problems," Dr. Scient. Thesis, Institute for
Informatics, University of Begen, Bergen, Norway. 1995
[14] A. Thesen, "Design and Evaluation of Tabu Search Algorithm for
Multiprocessor Scheduling," Journal of Heuristics, Vol. 4, pp. 141-160.
1998
[15] E.D. Taillard, "Parallel Taboo Search Techniques for the Job Shop
Scheduling Problem," ORSA Journal on Computing, Vol. 6 No. 2, pp.
108-117. 1994
[16] T. E. Morton, and D. W. Pentico, "Heuristic Scheduling Systems," New
York, NY: John Wiley & Sons. 1993
[17] E. F. Brigham, L.C. Gapenski, and M.C. Ehrhardt, "Financial
Management - Theory and Practice," Nine Edition, The Dryden Press, New York. 1999
[18] Z. Drezner, G.A. Marcoulides, and M.H Stohs, "Financial Applications
of a Tabu Search Variable Selection Method," Journal of applied Mathematics and Decisions Sciences, Vol. 5 No. 4, pp. 215-234. 2001
[19] G. J. Eidleman, , "A Guide to Failure Prediction," The CPA Journal,
February. 1995 Available
http://www.nysscpa.org/cpajournal/old/16641866.htm (May 2008).
[20] R.J. Freund, and R.C. Littell, R.C. "SAS System for Regression," Third
Edition, SAS Publishing. 2000. Available
from:http://www.books.google.mu/books?isbn=1580257259 (May 2008).
[21] M. Gendreau, M. "An Introduction to Tabu Search," (2002), Available
http://www.ifi.uio.no/infheur/bakgrunn/Intro_to_TS_Gendreau.htm
(May 2008).
[22] R. Roll, " R2 ," Journal of Finance, Vol. 43, pp. 541-566. 1988
[23] L. Shilton, and J. Teall, (1994), "Option-Based Prediction of
Commercial Mortgage Defaults," The Journal of Real Estate Research,
Vol. 9, pp. 219-236. 1994
[24] J. D. Thayer, "Stepwise Regression as an Exploratory Data Analysis
Procedure," 2002. Available:
http://www.eric.ed.gov/ERICWebPortal/recordDetail?accno=ED39389
0 (May 2008).
[1] C.E. Mossman, G.G. Bell, L.M. Swartz, and H.Turtle, "An Empirical Comparison of Bankruptcy Models," The Financial Review, Vol. 33, pp.
35-54.1998
[2] B.N. Gibson, "Bankruptcy Prediction: The Hidden Impact of Derivatives", 1998. Available http://www.trinity.edu/rjensen/acct/5341/1998sp/gidson/bankrupt.htm [May 2008].
[3] E. Altman, "Financial Ratios, Discriminant Analysis and The Prediction
of Corporate Bankruptcy," Journal of Finance. Vol. 23 No. 4, pp. 589-
609. 1968
[4] G.L.V. Springate, "Predicting the Possibility of Failure in a Canadian
Firm," M.B.A. Research Project, Simon Fraser University, January
1978. Unpublished.
[5] J.G. Jr. Fulmer, J.E. Moon, T. A.Gavin, , M.J. Erwin, "A Bankruptcy Classification Model for Small Firms," Journal of commercial Bank Lending, pp. 25-7.1984
[6] D.A. Botheras, (1979), "Use of A Business Failure Prediction Model for
Evaluating Potential and Existing Credit Risk," M.B.A. Research
Project, Simon Fraser University, March 1979. Unpublished.
[7] E.G. Sands, "Business Failure Prediction and the Efficient Market
Hypothesis," M.B.A. Research Project, Simon Fraser University,
November 1980. Unpublished
[8] F. Glover, and M. Laguna, "Tabu Search," Kluwer Academic Publishers,
Boston. 1997.
[9] F. Glover, "Future Paths for Integer Programming and Links to Artificial
Intelligence," Computers and Operations Research, Vol. 13, pp. 533-
549. 1986
[10] F. Glover, and M. Laguna, "Tabu Search," 1997 Available http:
//www.dei.unipd.it/~fisch/ricop/tabu_search_glover_laguna.pdf [May
2008].
[11] Z. Drezner, G.A. Marcoulides, G.A and S. Salhi, "Tabu Search Model
Selection in Multiple Regression Analysis," Communications of
Statistics, Vol. 28 No. 2, pp.349-367. 1999
[12] C. A. Anderson, K. Fraughnaugh, M. Parker, and J. Ryan, , "Path
Assignment for Call Routing: An Application of Tabu Search," Annals
of Operations Research, Vol. 41, pp.301-312. 1993
[13] A. L├ÿkketangen, "Tabu Search as a Metaheuristic Guide for
Combinatorial Optimisation Problems," Dr. Scient. Thesis, Institute for
Informatics, University of Begen, Bergen, Norway. 1995
[14] A. Thesen, "Design and Evaluation of Tabu Search Algorithm for
Multiprocessor Scheduling," Journal of Heuristics, Vol. 4, pp. 141-160.
1998
[15] E.D. Taillard, "Parallel Taboo Search Techniques for the Job Shop
Scheduling Problem," ORSA Journal on Computing, Vol. 6 No. 2, pp.
108-117. 1994
[16] T. E. Morton, and D. W. Pentico, "Heuristic Scheduling Systems," New
York, NY: John Wiley & Sons. 1993
[17] E. F. Brigham, L.C. Gapenski, and M.C. Ehrhardt, "Financial
Management - Theory and Practice," Nine Edition, The Dryden Press, New York. 1999
[18] Z. Drezner, G.A. Marcoulides, and M.H Stohs, "Financial Applications
of a Tabu Search Variable Selection Method," Journal of applied Mathematics and Decisions Sciences, Vol. 5 No. 4, pp. 215-234. 2001
[19] G. J. Eidleman, , "A Guide to Failure Prediction," The CPA Journal,
February. 1995 Available
http://www.nysscpa.org/cpajournal/old/16641866.htm (May 2008).
[20] R.J. Freund, and R.C. Littell, R.C. "SAS System for Regression," Third
Edition, SAS Publishing. 2000. Available
from:http://www.books.google.mu/books?isbn=1580257259 (May 2008).
[21] M. Gendreau, M. "An Introduction to Tabu Search," (2002), Available
http://www.ifi.uio.no/infheur/bakgrunn/Intro_to_TS_Gendreau.htm
(May 2008).
[22] R. Roll, " R2 ," Journal of Finance, Vol. 43, pp. 541-566. 1988
[23] L. Shilton, and J. Teall, (1994), "Option-Based Prediction of
Commercial Mortgage Defaults," The Journal of Real Estate Research,
Vol. 9, pp. 219-236. 1994
[24] J. D. Thayer, "Stepwise Regression as an Exploratory Data Analysis
Procedure," 2002. Available:
http://www.eric.ed.gov/ERICWebPortal/recordDetail?accno=ED39389
0 (May 2008).
@article{"International Journal of Business, Human and Social Sciences:58849", author = "J. Cheeneebash and K. B. Lallmamode and A. Gopaul", title = "Predicting Bankruptcy using Tabu Search in the Mauritian Context", abstract = "Throughout this paper, a relatively new technique, the Tabu search variable selection model, is elaborated showing how it can be efficiently applied within the financial world whenever researchers come across the selection of a subset of variables from a whole set of descriptive variables under analysis. In the field of financial prediction, researchers often have to select a subset of variables from a larger set to solve different type of problems such as corporate bankruptcy prediction, personal bankruptcy prediction, mortgage, credit scoring and the Arbitrage Pricing Model (APM). Consequently, to demonstrate how the method operates and to illustrate its usefulness as well as its superiority compared to other commonly used methods, the Tabu search algorithm for variable selection is compared to two main alternative search procedures namely, the stepwise regression and the maximum R 2 improvement method. The Tabu search is then implemented in finance; where it attempts to predict corporate bankruptcy by selecting the most appropriate financial ratios and thus creating its own prediction score equation. In comparison to other methods, mostly the Altman Z-Score model, the Tabu search model produces a higher success rate in predicting correctly the failure of firms or the continuous running of existing entities.
", keywords = "Predicting Bankruptcy, Tabu Search", volume = "3", number = "10", pages = "1984-10", }
