Volume 9, Number 6

Insolvency Prediction Analysis of Italian Small Firms by Deep Learning

  Authors

Agostino Di Ciaccio¹ and Giovanni Cialone², ¹University of Rome, La Sapienza, Italy and ²Senior partner of Kairos Advisory srl., Italy

  Abstract

To improve credit risk management, there is a lot of interest in bankruptcy predictive models. Academic research has mainly used traditional statistical techniques, but interest in the capability of machine learning methods is growing. This Italian case study pursues the goal of developing a commercial firms insolvency prediction model. In compliance with the Basel II Accords, the major objective of the model is an estimation of the probability of default over a given time horizon, typically one year.

The collected dataset consists of absolute values as well as financial ratios collected from the balance sheets of 14.966 Italian micro-small firms, 13,846 ongoing and 1,120 bankrupted, with 82 observed variables. The volume of data processed places the research on a scale like that used by Moody’s in the development of its rating model for public and private companies, RiskcalcTM. The study has been conducted using Gradient Boosting, Random Forests, Logistic Regression and some deep learning techniques: Convolutional Neural Networks and Recurrent Neural Networks. The results were compared with respect to the predictive performance on a test set, considering accuracy, sensitivity and AUC. The results obtained show that the choice of the variables was very effective, since all the models show good performances, better than those obtained in previous works. Gradient Boosting was the preferred model, although an increase in observation times would probably favour Recurrent Neural Networks.

  Keywords

Credit risk, Bankruptcy prediction, Deep learning