Estimating Probabilities of Default With Support Vector Machines
by Wolfgang K. Härdle of Humboldt-Universität zu Berlin,
May 27, 2007
Abstract: This paper proposes a rating methodology that is based on a non-linear classification method, the support vector machine, and a non-parametric technique for mapping rating scores into probabilities of default. We give an introduction to underlying statistical models and represent the results of testing our approach on German Bundesbank data. In particular we discuss the selection of variables and give a comparison with more traditional approaches such as discriminant analysis and the logit regression. The results demonstrate that the SVM has clear advantages over these methods for all variables tested.
Keywords: Bankruptcy, Company rating, Default probability, Support vector machines.