<abstract xmlns="http://www.w3.org/1999/xhtml"><bold>Research background:</bold> Even though in recent decades, a lot of new techniques were developed, there is still a lack of studies aimed at comparing the performance of variable selection methods. Bankruptcy prediction is an excellent example of the conservative research field with the tendency to use classical approaches. Although the results of studies in this field are directly applied in banks and other financial institutions, variables selected for these models can be biased by the author’s preference for one technique.<bold>Purpose:</bold> This work aims to compare different variable selection approaches and introduce a new methodology of sequential variable selection that can be applied when the low-dimensional model is preferred.<bold>Research methodology:</bold> This study has been conducted on Polish companies’ insolvency data from the period of 2007–2013. The risk has been modeled with logistic regression; hence variables have been selected with approaches suitable for linear models.<bold>Results:</bold> The one-step methods did not lead to sufficient dimensionality reduction, while the sequential approach provided compact models keeping the high-performance level. Also, this method allowed us to identify the main financial determinants of insolvency for studied companies, which are the volume of total assets and the ratio of profit to total assets.<bold>Novelty:</bold> This paper compares different variable selection methods and demonstrates the effectiveness of their sequential application for dimensionality reduction.</abstract>

Research background: Even though in recent decades, a lot of new techniques were developed, there is still a lack of studies aimed at comparing the performance of variable selection methods. Bankruptcy prediction is an excellent example of the conservative research field with the tendency to use classical approaches. Although the results of studies in this field are directly applied in banks and other financial institutions, variables selected for these models can be biased by the author’s preference for one technique.Purpose: This work aims to compare different variable selection approaches and introduce a new methodology of sequential variable selection that can be applied when the low-dimensional model is preferred.Research methodology: This study has been conducted on Polish companies’ insolvency data from the period of 2007–2013. The risk has been modeled with logistic regression; hence variables have been selected with approaches suitable for linear models.Results: The one-step methods did not lead to sufficient dimensionality reduction, while the sequential approach provided compact models keeping the high-performance level. Also, this method allowed us to identify the main financial determinants of insolvency for studied companies, which are the volume of total assets and the ratio of profit to total assets.Novelty: This paper compares different variable selection methods and demonstrates the effectiveness of their sequential application for dimensionality reduction.

A Comparison of Variables Selection Methods and their Sequential Application: A Case Study of the Bankruptcy of Polish Companies

Faculty of Mathematics, Informatics and Mechanics

Folia Oeconomica Stetinensia

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Research background: Even though in recent decades, a lot of new techniques were developed, there is still a lack of studies aimed at comparing the performance...

A Comparison of Variables Selection Methods and their Sequential Application: A Case Study of the Bankruptcy of Polish Companies

Published Online: Aug 20, 2020

Page range: 531 - 543

Received: Aug 28, 2019

Accepted: Mar 19, 2020

DOI: https://doi.org/10.2478/foli-2020-0031

Keywords
Variable Selection, Ensemble Models, Bayesian Model Averaging, LASSO, Bankruptcy Prediction

© 2020 Mikhail Zanka, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

A Comparison of Variables Selection Methods and their Sequential Application: A Case Study of the Bankruptcy of Polish Companies

Published Online: Aug 20, 2020

Page range: 531 - 543

Received: Aug 28, 2019

Accepted: Mar 19, 2020

DOI: https://doi.org/10.2478/foli-2020-0031

KeywordsVariable Selection, Ensemble Models, Bayesian Model Averaging, LASSO, Bankruptcy Prediction

© 2020 Mikhail Zanka, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
Variable Selection, Ensemble Models, Bayesian Model Averaging, LASSO, Bankruptcy Prediction