Bankruptcy prediction with least squares support vector machine classifiers

Classification algorithms like linear discriminant analysis and logistic regression are popular linear techniques for modelling and predicting corporate distress. These techniques aim at finding an optimal linear combination of explanatory input variables, such as, e.g., solvency and liquidity ratios, in order to analyse, model and predict corporate default risk. Recently, performant kernel based nonlinear classification techniques, like support vector machines, least squares support vector machines and kernel fisher discriminant analysis, have been developed. Basically, these methods map the inputs first in a nonlinear way to a high dimensional kernel-induced feature space, in which a linear classifier is constructed in the second step. Practical expressions are obtained in the so-called dual space by application of Mercer´s theorem. In this paper, we explain the relations between linear and nonlinear kernel based classification and illustrate their performance on predicting bankruptcy of mid-cap firms in Belgium and the Netherlands.