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Forecasting bank failures and stress testing: A machine learning approach

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  • Gogas, Periklis
  • Papadimitriou, Theophilos
  • Agrapetidou, Anna

Abstract

This paper presents a forecasting model of bank failures based on machine-learning. The proposed methodology defines a linear decision boundary that separates the solvent banks from those that failed. This setup generates a novel alternative stress-testing tool. Our sample of 1443 U.S. banks includes all 481 banks that failed during the period 2007–2013. The set of explanatory variables is selected using a two-step feature selection procedure. The selected variables were then fed to a support vector machines forecasting model, through a training–testing learning process. The model exhibits a 99.22% overall forecasting accuracy and outperforms the well-established Ohlson’s score.

Suggested Citation

  • Gogas, Periklis & Papadimitriou, Theophilos & Agrapetidou, Anna, 2018. "Forecasting bank failures and stress testing: A machine learning approach," International Journal of Forecasting, Elsevier, vol. 34(3), pages 440-455.
    • Handle: RePEc:eee:intfor:v:34:y:2018:i:3:p:440-455
    DOI: 10.1016/j.ijforecast.2018.01.009
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