IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO.
4, JULY 2012 421
Machine Learning in Financial Crisis
Prediction: A Survey
Wei-Yang Lin, Ya-Han Hu, and Chih-Fong Tsai
Abstract—For financial institutions, the ability to predict or fore-
cast business failures is crucial, as incorrect decisions can have
direct financial consequences. Bankruptcy prediction and credit
scoring are the two major research problems in the accounting
and finance domain. In the literature, a number of models have
been developed to predict whether borrowers are in danger of
bankruptcy and whether they should be considered a good or bad
credit risk. Since the 1990s, machine-learning techniques, such as
neural networks and decision trees, have been studied extensively
as tools for bankruptcy prediction and credit score modeling. This
paper reviews 130 related journal papers from the period between
1995 and 2010, focusing on the development of state-of-the-art
machine-learning techniques, including hybrid and ensemble clas-
sifiers. Related studies are compared in terms of classifier design,
datasets, baselines, and other experimental factors. This paper
presents the current achievements and limitations associated with
the development of bankruptcy-prediction and credit-scoring mod-
els employing machine learning. We also provide suggestions for
future research.
Index Terms—Bankruptcy prediction, credit scoring, ensemble
classifiers, hybrid classifiers, machine learning.
I. INTRODUCTION
ANKRUPTCY prediction has a significant influence on
B the decisions made by financial institutions, as erroneous
decisions can have dire financial consequences. This has made
bankruptcy prediction one of the major problems that are faced
by decision makers in the realm of finance, leading to the de-
velopment of numerous bankruptcy-prediction models, and at-
tracting considerable attention both from academics and those
in the business community [71].
Credit scoring, which focuses on credit admission evaluation,
is another serious issue for those in financial institutions, who
must determine whether loan customers belong to a high risk
group, i.e., possessing a high risk [56].
Bankruptcy prediction and credit scoring are the two most im-
portant financial issues which decision makers face in financial
Manuscript received February 24, 2011; revised July 18, 2011; accepted
September 24, 2011. Date of publication November 3, 2011; date of current
version June 13, 2012. This work was supported in part by the National Science
Council of Taiwan under Grant NSC 96-2416-H-194-010-MY3. This paper was
recommended by Associate Editor B. Chaib-draa.
W.-Y. Lin is with the Department of Computer Science and Information En-
gineering, National Chung Cheng University, Chiayi County 62102, Taiwan
(e-mail: wylin@cs.ccu.edu.tw).
Y.-H. Hu is with the Department of Information Management,
National Chung Cheng University, Chiayi County 62102, Taiwan (e-mail:
yahan.hu@mis.ccu.edu.tw).
C.-F. Tsai is with the Department of Information Management,
National Central University, Taoyuan County 32001, Taiwan (e-mail:
cftsai@mgt.ncu.edu.tw).
Digital Object Identifier 10.1109/TSMCC.2011.2170420
1094-6977/$26.00 © 2011 IEEE
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institutions, both of which can be regarded as binary classifi-
cation problems to assign new observations to two predefined
decisions as classes (e.g., “good” and “bad” risk classes) [139].
In machine learning, the creation of a neural network is a well-
known technique that has been widely used for the development
of bankruptcy-prediction and credit-scoring models since the
1990s [1], [35], [44], [169]. For example, in [18] 27 related
studies were reviewed that concern the evaluation of business
risk, of which 12 focused on bankruptcy. In [155], 66 papers
in business were reviewed, 13 of which focused on bankruptcy
prediction. The review in [156] covered 54 papers in the field
of finance, of which 11 addressed the problem of bankruptcy
prediction. In [150], 38 papers out of 48 papers in the finance
domain focused on bankruptcy prediction.
A number of researchers have reviewed related literature for
domain problems associated with bankruptcy prediction and
credit scoring prior to 2000. In [35], papers were classified in
terms of country, industrial sector, and period of data as well as
the financial ratios and models or methods that are employed.
In [137], both statistical and operational based techniques that
are used to support credit scoring were surveyed. Similarly,
in [44] a wide range of statistical methods was reviewed for the
problem of credit scoring.
Recently, in [7] an extensive review of traditional statisti-
cal methods for the prediction of bankruptcy has been pre-
sented, without addressing machine-learning-based methods.
In [71], the work preformed prior to 2005 was reviewed, in
which statistical and machine-learning techniques were applied
to overcome the bankruptcy-prediction problem. In particular,
they highlighted the source of datasets, financial ratios, country
of origin, time line of study, and the comparative performance of
various techniques in terms of prediction accuracy. In contrast,
in [33] several related studies were reviewed to assess consumer
credit risk, using statistical and machine-learning techniques,
comparing the predictive accuracy of various classifiers. The
most recent review [151] presented a comprehensive review of
hybrid- and ensemble-based techniques that are used for the pre-
diction of bankruptcy, focusing on the means by which various
techniques are combined, rather than the results obtained.
Each of the aforementioned review papers looked at these
issues from a different perspective. Unfortunately, most of this
research is out of date and provides little insight into the tech-
niques that have been developed recently, thereby increasing the
difficulty to determine trends for future research. In addition,
many previous reviews have only focused on statistical methods
and/or neural networks as core techniques. Many bankruptcy-
prediction and credit-scoring models that use machine-learning
techniques have been investigated recently (c.f., Section III),
422 IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO. 4, JULY 2012
although most of the reviews provide only a general view of
the associated techniques. In other words, no comprehensive
comparison of statistical methods has been presented. What
kinds of techniques have been most widely developed? What
techniques are used as a representative baseline for compari-
son? What evaluation strategies, model training, and datasets
are commonly employed?
This paper provides a statistical survey of papers related to the
prediction of bankruptcy and credit scoring published between
1995 and 2010. In particular, we examine the techniques that
have been used (in addition to neural networks), examine the
experiments that have been conducted, and consider directions
for future work from the perspective of machine learning. We
reviewed a total of 130 journal papers.
This paper is organized as follows. In Section II, we provide
a comparison of related studies using various machine-learning
techniques, divided into single and soft classification techniques.
In Section III, we compare related studies in terms of evaluation
methodology, including baselines, datasets, and experimental
results. A discussion, conclusions, and suggestions for future
research are presented in Section IV.
II. MACHINE-LEARNING TECHNIQUES
A. Pattern Classification
The goal of classification is to allocate an (unknown) instance
that is represented by particular features into one correct class
from a finite set of classes. The task of learning (or training)
involves the computation of a classifier or model by approx-
imating the mapping between input–output examples, which
enables the correct labeling of the training set at a particular
level of accuracy. After the model is generated or trained, it
can be used to classify unknown instances into one of the class
labels that are learned in the training set [37], [103].
The task of learning (or training) involves the computation
of a classifier or model by approximating the mapping between
input–output examples, which enables the correct labeling of the
training set at a particular level of accuracy. After the model is
generated or trained, it can be used to classify unknown instances
into one of the class labels that are learned in the training set.
For cases of bankruptcy prediction and credit scoring, each
data sample in the selected dataset comprises a number of fi-
nancial ratios and corresponding binary class labels, represent-
ing bankruptcy/nonbankruptcy for bankruptcy prediction and
good/bad credit for credit scoring, respectively. This enables the
training and testing of the classifier as a bankruptcy-prediction
model or credit-scoring model based on one specific classifica-
tion technique.
B. Single Classification Techniques
In general, the problem to predict financial crises can be ap-
proached by designating a single classifier. Many studies have
been limited to a single classification technique with which
to develop bankruptcy-prediction and credit-scoring models.
Table I lists related studies on constructing financial crisis pre-
diction models that are based on single classifiers. More specif-
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Fig. 1. Year-wise distribution of articles for neural networks, support vector
machines, and genetic algorithms.
ically, these single classification techniques are divided into
four groups, which are supervised learning, unsupervised learn-
ing, statistics-based learning, and other techniques. In addition,
these models are compared with other single baseline models
in terms of prediction performance with which to reach a final
conclusion.
In addition to comparative studies of individual classifiers,
several studies have focused on whether feature selection influ-
ences the performance of specific single classifiers [86], [90],
[94], [116], [117], [128], [135], [140], [160]. All of these studies
confirmed that considering the selection of features to reduce
dimensionality promotes the performance of single classifiers
beyond what is possible without considering feature selection.
However, it is interesting to note that for the 130 related studies
that are addressed in this paper, only half of them considered
feature selection prior to the training of classifiers. Most studies
without feature selection employed the original features pro-
vided in the datasets, which are available for public download
(cf., Section III-B) or selected the features according to the
advice of domain experts. Note that a discussion of related fi-
nancial ratios as important features is beyond the scope of this
survey; see [35] and [71] for further details.
In the comparison of single classifiers that are shown in
Table I, neural networks, support vector machines, and genetic
algorithms are the three major machine-learning techniques that
are used in the prediction of financial crises. Fig. 1 shows year-
wise distribution of articles using these three techniques. Ob-
serve that neural networks are the most widely used technique
for the development of prediction models. This corresponds to
important survey literature, depicting the popularity of these
techniques in many domain problems, [17], [38], [126], [155],
[156], [169].
C. Soft Classification Techniques
This section comprises two parts. The first part is an overview
of two well-known types of soft classification techniques: clas-
sifier ensembles and hybrid classifiers. They are widely consid-
ered the core techniques showing superiority over many single
classification techniques in the prediction of financial crises.
Next, the second part provides a comparison of related studies
using soft classification techniques.
1) Classifier Ensembles: In pattern recognition and machine
learning, the combination of classifiers has recently become an
LIN et al.: MACHINE LEARNING IN FINANCIAL CRISIS PREDICTION: A SURVEY
TABLE I
COMPARISONS OF SINGLE CLASSIFIERS
area of active research [43]. The idea of combining classifiers
can be expressed using a probabilistic framework

K
p(t|x) = wk p(t|x, k)
k =1
where p(t | x) is the conditional distribution given the input
variable x, k = 1, 2, . . ., K indexes a set of possible models,
and wk represents the probability for each model. It can be
called classifier ensembles or multiple classifiers. They were
proposed to improve the classification performance of single
classifiers [67]. That is, the combination compensates for errors
made by individual classifiers on different parts of the input
space. In this manner, the performance of modular classifiers
generally outperforms even the best single classifiers used in
isolation.
Classifier ensembles are based on the divide-and-conquer
principle, in which a complex problem is divided into subprob-
lems (i.e., simpler task), which are then solved using various
classification techniques. The solution is then reassembled from
the results of the subtasks.
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423
In the literature, several combination methods have been used
to combine multiple classifiers. The simplest method is majority
voting. After the outputs of individual classifiers are produced,
the class with highest number of votes is selected as the final
(1) classification decision. The other two representative methods
are bagging and boosting. In bagging, several classifiers are
trained independently using various training sets via the boot-
strap method [15]. For example, consider a problem in which
we are trying to predict credit risk that is based on the input data
x. We can generate K bootstrap datasets by randomly sampling
with replacement from the original training data. Then, we use
each bootstrap dataset to train a separate predictive model yk (x)
where k = 1, 2, . . ., K. By doing so, each training example may
appear repeatedly but not at all in any particular training dataset
of K. The final prediction of credit risk is given by
1 
K
y(x) = yk (x). (2)
K
k =1
This procedure has been extensively analyzed in the machine-
learning literature and proved to be an effective mean for
424 IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO. 4, JULY 2012
combining multiple models. For instance, the theoretical anal-
ysis in [37] suggests that the average error of a model can be
reduced to 1/K by averaging K versions of the model.
On the other hand, in boosting, although like bagging that
each classifier is trained using different training sets, the K
classifiers are trained not in a parallel and independent way,
but sequentially. More specifically, each weak classifier yk (x),
where k = 1, 2, . . ., K, is trained using a weighted form of
the original training data, i.e., each data point having an asso-
ciated weighting coefficient. At each iteration of the boosting
algorithm, the weighting coefficients are adjusted so that the
training samples that are misclassified by the current weak clas-
sifier receive greater weight. In the next iteration, a new weak
classifier is trained using the updated weighted dataset. As a
result, the previously misclassified data points will exert more
influence in training a subsequent classifier. After K iterations,
we can obtain a strong classifier in the following form:
K  cluster. After performing K-means algorithm, the samples with

y(x) = sign αk yk (x) (3)
k =1
where the value of αk represents a weighted measure of the clas-
sification accuracy of the weak classifier yk (x); in other words,
αk assigns greater weight to more accurate weak classifier [42].
2) Hybrid Classifiers: The concept of hybrid classifiers is
based on combining two or more heterogeneous machine-
learning techniques. There are three ways to build hybrid classi-
fiers. The first one involves cascading different classifiers. This
approach is similar to boosting, in which multiple classifiers are
combined in a sequential manner. However, cascaded hybrid
classifiers are based on combining heterogeneous classifiers,
and the number of cascaded classifiers is usually small, such
as 2. More specifically, first-level classifiers are trained for a
specific problem, and the output of this classifier becomes the
input for the second-level classifier, and so on. To name just a
few, one well-known hybrid approach is based on neuro-fuzzy
techniques [61], [96], in which a neural network model repre-
sents the first-level classifier whose outputs are used as inputs
to create fuzzy rules in the second-level classifier as a fuzzy
inference system.
On the other hand, cascading two classification techniques
can be defined as follows. Given a training dataset D that con-
tains m training examples, which is used to train and test the first
classifier. Since it is not possible to obtain 100% classification
accuracy over the training set, the correctly classified data D by
the first classifier are collected, where D contains n examples
(n < m and D ∈D). Then, D is used to train the second classifier.
In [141], the second classifier can provide better classification
results than single classifiers trained by the original dataset D
over a given testing set.
The second approach is based on combining clustering and
classification techniques serially. In the first component, a clus-
tering algorithm, such as self-organizing maps (SOM) [69], is
used to preprocess the given dataset. Generally, this stage has
two purposes. The first purpose is to preprocess the input sam-
ples to eliminate nonrepresentative training examples from each
class. The second purpose is to identify classes of patterns for
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subsequent supervised classification [60]. Clustering results can
be used for either the preclassification of unlabeled samples or
the identification of major populations in a given dataset. The
clustering results are then used as training examples to design
classifiers. This second stage is the same as that used for training
or constructing classifiers.
For instance, Hsieh [47] introduces a hybrid method for the
credit-scoring problem. He first utilizes K-means clustering to
generate clusters with new class labels and eliminate the un-
representative samples from each cluster. In principle, K-means
clustering aims to partition a dataset {x1 , x2 , . . .,xN } into K
subsets so as to minimize the distortion measure

N 
K
rn k xn − μk 2 (4)
n =1 k =1
where binary indicator rn k denotes that the data point xn is
assigned to the kth cluster, and μk denotes the mean of the kth
new class labels are utilized in training the neural network. The
experimental results demonstrate that clustering helps construct
a more effective neural network for credit scoring.
The third method to construct hybrid classifiers is based on
integrating two different techniques into a “single” module for
classification, in which the integrated techniques complement
each other. One well-known example is the one in which training
a single classifier, such as the backpropagation neural network,
requires a set number of parameters to obtain an optimal classi-
fier. To this end, a number of algorithms can be used to identify
optimal parameter settings, such as genetic algorithms [70], to
train the neural network.
For instance, Hu [49] employs the genetic algorithms to de-
termine the connection weights of the single-layer perceptron
(SLP). When an input pattern xi is presented to the proposed
SLP in [49], the corresponding actual value is defined as
1 +
si = (S − Si− ) (5)
m i
where m represents the number of training samples, and S+ i and
S−i , respectively, denote the outranking and outranked characters
of xi over all training samples. The experimental results show
that the genetic algorithm (GA)-based SLP outperforms the
traditional SLP in bankruptcy prediction.
Note that many hybrid-based studies do not include the hy-
brid classifiers that are defined in this paper, focusing on the
performance of feature selection [59] as the first component
with the output, i.e., the selected features, used to train specific
individual classifier(s) as the second component.
3) Comparisons of Related Work: Before comparing related
work, we provide a list of techniques and their correspond-
ing abbreviations shown in Table II to make later tables more
readable.
Table III lists studies that developed prediction models using
classifier ensembles, comparing them with single classifiers in
terms of prediction performance. Their results show that ensem-
ble techniques outperform individual techniques. More specif-
ically, a number of studies have attempted to construct differ-
ent classifier ensembles for comparison, such as [105], [108],
LIN et al.: MACHINE LEARNING IN FINANCIAL CRISIS PREDICTION: A SURVEY
TABLE II
A LIST OF TECHNIQUES AND THEIR CORRESPONDING ABBREVIATIONS
TABLE III
RELATED WORK USING ENSEMBLE TECHNIQUES
and [145]. The results in Table III indicate that a great deal of
work has gone into adopting neural network ensembles for the
prediction of financial crises.
Table IV lists related work associated with three types of
hybrid classifiers: cascaded, cluster + single, and integrated-
based hybrid classifiers.
Regarding the comparisons shown in Tables III and IV, many
recent studies have constructed different classifier ensembles
and hybrid classifiers for the prediction of financial crises. More
specifically, hybrid classification techniques are more widely
considered than ensemble. There are two possible reasons for
this. First, it is necessary to train and test a certain number
of classifiers for later combination, and no exact solution is
available concerning the number of classifiers that should be
combined? This results in excessive computational cost. Sec-
ond, the issue of diversity in the combined classifiers is critical
for success. That is, individual classifiers must be as diversified
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425
TABLE IV
RELATED WORK USING HYBRID CLASSIFICATION TECHNIQUES
as possible to ensure that classifier ensembles perform better
than single classifiers. Consequently, it is necessary to use dif-
ferent training sets to train individual classifiers and different
classification techniques for combination. This increases the
complexity of the experiments.
Recently, hybrid classifiers have been constructed more of-
ten than classifier ensembles; therefore, it is worthwhile taking
time to determine how many studies have focused on cascaded,
cluster + single, and integrated-based hybrid classifiers. Fig. 2
shows year-wise distribution of articles for the three types of
hybrid classifiers.
Clearly, integrated-based and cascaded hybrid techniques are
the two most commonly used techniques. In integrated-based
hybrid techniques, two algorithms are usually selected for inte-
gration, in which one performs the task of classification and the
other is used to turn some parameters of the classifier. The re-
sults show that SVM [149] and MLP are the two most commonly
426 IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO. 4, JULY 2012

TABLE V
BASELINE CLASSIFIERS USED IN THE LITERATURE

Fig. 2. Year-wise distribution of articles for hybrid classifiers.

used classifiers, and GA is widely used to optimize the parame-

ters for training these two classifiers. On the other hand, because
there are many possibilities in cascading learning algorithms, it
is difficult to identify the most popular ones.
In short, although several recent studies have focused mainly
on developing individual classifiers (where MLP and SVM are
the two most commonly used classifiers), soft classification
techniques are currently the trend for the prediction of financial
crises. This is because of the fact that many of these techniques
outperform single classification techniques. More specifically,
MLP classifier ensembles, and GA+SVM or MLP integrated-
based hybrid classifiers have been widely developed in the
literature.

III. MODEL EVALUATION

In addition to comparing related studies on machine-learning
techniques, we must also examine experimental setups and eval-
uation methodology to assess the prediction performance of con-
structed classifiers. This is because evaluation is critical to fully are mentioned earlier. In other words, they report that their
understanding the performance of the developed models. In the soft classification techniques outperform single classification
following, we survey a number of important issues, such as rep- approaches; however, they are not compared with other ensem-
resentative baseline classifiers for comparison and datasets used bles and/or hybrid classifiers for further validation. Some excep-
in experiments. tions include [58], in which a hybrid classifier is proposed based
on SOM and MLP, comparing this hybrid classifier with SOM
A. Baseline Classifiers ensembles. In [166], cascaded hybrid classifiers are developed,
using MLP ensembles for comparisons. For ensemble classi-
Generally, researchers select specific baseline classifiers as fiers, in [167] DT ensembles are constructed using the bagging
models with which to validate classifiers for the prediction of method and compared them with MLP ensembles.
financial crises. The aim of this section is to verify the exis-
tence of generally agreed upon baseline models in the literature.
Table V lists 19 baseline classifiers that are used in various stud- B. Datasets
ies, CBR, DT, ensembles, fuzzy sets, GA, hybrid classifiers,
In addition to selecting baseline models for comparison,
k-NN, k-means, LDA/MDA, LR, MARS, MLP, naı̈ve Bayes,
the foremost issue in such experiments is the selection of
probabilistic neural networks (PNN), radial basis function neu-
dataset(s). In the literature, different studies have used different
ral networks (RBFN), rough sets [109], SOM, SVM, and wavelet
datasets, some of which are publicly downloadable, such as the
NN. In addition, Table VI shows year-wise distribution of ar-
Australian,1 German,2 and Japanese3 datasets for the prediction
ticles for these baseline classifiers. More specifically, Fig. 3
of bankruptcy and credit scoring, while others collected data
shows the top five most commonly used baseline models in
from local companies in specific countries. Table VII lists the
related studies, MLP, LR, LDA/MDA, DT, and SVM.
datasets used in related studies including their sizes and num-
These statistics show that MLP is the most widely used base-
bers of attributes. Note that except the public datasets, different
line classifier for the prediction of financial crises, and LR and
studies used different numbers of attributes and data samples
LDA/MDA are two most commonly used statistical methods to
develop baseline models. However, since 2005, many studies
1 http://archive.ics.uci.edu/ml/datasets/Statlog+(Australian+Credit+Appro
have adopted SVM as their baseline classifier.
val)
For studies that focus on ensemble or hybrid classifiers, most 2 http://archive.ics.uci.edu/ml/datasets/Statlog+(German+Credit+Data)

baselines have been based on some of the single classifiers that 3 http://archive.ics.uci.edu/ml/datasets/Japanese+Credit+Screening

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LIN et al.: MACHINE LEARNING IN FINANCIAL CRISIS PREDICTION: A SURVEY
TABLE VI
YEAR-WISE DISTRIBUTION OF ARTICLES FOR BASELINE CLASSIFIERS
Fig. 3. Top five most widely used baseline models.
over the same datasets. Table VIII shows year-wise distribution
of articles using the selected datasets. Fig. 4 shows the top seven
mostly commonly used datasets in the literature.
These results show that the Australian and German datasets
are the two most widely selected for the prediction of finan-
cial crises. Although they are publicly available, only 47 related
studies are based on these datasets. Most related studies have
used their own collected datasets for experiments. The advan-
tage to use public datasets is that they enable future researchers
to make direct and fair comparisons; however, they lack applica-
bility to a number of specific real-world problems. Conversely,
local datasets can be applied directly to practical problems;
however, it is very difficult for future researchers to compare
the results.
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427
Following the selection of a dataset, it must be divided into
training and testing subsets to evaluate the prediction perfor-
mance of the constructed classifiers. In this survey, we found
no generally agreed upon proportion for training and testing
sets, even when using the same datasets. Table IX shows the
proportions of training and testing sets that are used in related
datasets. Note that studies failing to specify this information are
not presented in Table IX.
These results show that different studies used different sizes
of training and testing data for the design and evaluation of
classifiers, even when using the same datasets. This indicates a
need for sensitivity analysis with regard to the size of training
and testing sets to make the final conclusion. This issue has been
considered by only a few researchers, such as [135] and [139].
To conduct a reliable experiment, the n-fold cross-validation
strategy should be considered. This method eliminates variabil-
ity in samples, which may influence the performance of predic-
tion models and minimize the effect of bias. However, only 53
of the 130 studies used cross-validation strategies in performing
the tests. This implies that the conclusions made by numbers of
the studies are not necessarily reliable.
From the point of view of machine learning, the aim to pre-
dict financial crises is to develop well-performing classifiers.
Because it is difficult to collect large numbers of real cases
of financial crisis (i.e., the dataset size is usually small), the
design of experiments is critical to obtaining reliable findings.
428 IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO. 4, JULY 2012

TABLE VII
DATASETS USED IN THE LITERATURE

Unfortunately, very few related studies have been concerned
with this issue.
C. Prediction Performances
Investigating the prediction performance of various classifi-
cation techniques provides a deeper understanding of the current
state of affairs, enabling future researchers to take the next step.
In addition, although datasets are used differently in different
studies, it may be worth examining the relationship between
selected datasets, prediction accuracy, and whether feature se-
lection is involved in the experiments.
In the literature, a variety of measurements are used to assess
the prediction performance of classifiers, such as the accuracy
rate, and the Type I and II error rates. This study considers only
the accuracy rate because performance is examined in nearly all
related studies, and this is the most straightforward indicator of
performance. In particular, we present only the best performance
(i.e., the highest rate of accuracy) for each dataset in each year
between 1995 and 2010.
Table X shows the relationship between datasets and their
predication accuracy. Note that A., B., C., G., J., K., S., Tai.,
and Tur. represent Australian, Benelux, Compustat, German,
Japanese, Korea, Spanish, Taiwan, and Turkish, respectively. In
addition, “Y” and “N” followed by prediction accuracy means
performing and not performing feature selection, respectively.
With regard to Table X, only the U.K. and U.S. datasets
showed improvements in performance from 2005 to 2010 and
1996 to 2010, respectively. It is surprising that the use of pub-
lic datasets, i.e., Australian, German, and Japanese, in recent
studies that involved advanced techniques do not perform bet-
ter than those in previous studies. Similarly, other datasets

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LIN et al.: MACHINE LEARNING IN FINANCIAL CRISIS PREDICTION: A SURVEY 429

TABLE VIII
YEAR-WISE DISTRIBUTION OF ARTICLES FOR THE CHOSEN DATASETS

Fig. 4. Top seven most widely used datasets.

demonstrate the same situation. This reveals the need to use
a generally agreed upon evaluation methodology with regard to
datasets, the proportion of training and testing sets, and feature
selection, to fully understand the progress of machine-learning
techniques in the prediction of financial crises.
Because many of these datasets are difficult to collect,
we present only the average performances of the Australian,
German, and Japanese datasets for future researchers. On aver-
age, current classification techniques provide 89.59%, 85.33%,
and 87.93% over these three datasets, respectively. This im-
plies that future classification techniques should provide higher
accuracy rates than the average results using these three
datasets.
D. Comparisons of Bankruptcy-Prediction Models
In this section, the bankruptcy-prediction models using sin-
gle, ensemble, and hybrid machine-learning techniques are com-
pared in terms of their prediction performances. This compar-
ison is possible to figure out which methods are superior to
others. However, since related studies used different numbers
of attributes and data samples over the same datasets, it is not
feasible to directly compare these models. Nevertheless, many

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430 IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO. 4, JULY 2012
TABLE IX
PROPORTIONS OF TRAINING AND TESTING SETS USED IN RELATED DATASETS
studies used similar experimental settings over the pub-
lic datasets, i.e., the Australian, German, and Japanese
datasets. Therefore, the prediction performances to use different
machine-learning techniques over these three datasets are com-
pared, and Table XI shows the comparative results. Note that
the best performance in each technique is underlined.
It is interesting that there is no exact winner for these three
datasets. That is, the single, ensemble, and hybrid models per-
form best over the German, Australian, and Japanese datasets,
respectively. However, the hybrid model by combining clus-
tering analysis with a single classifier [47] provides the high-
est rate of prediction accuracy. Particularly, it combines the
k-means clustering algorithm with the multilayer perceptrons
(MLP) neural network. On the other hand, ensemble classifiers
by bagging-based MLP neural networks [105] perform best and
second best over the Japanese and Australian datasets.
Fig. 5 shows the average accuracy of the bankruptcy-
prediction models by single, ensemble, and hybrid machine-
learning techniques over the Australian, German, and Japanese
datasets. On average, hybrid prediction models outperform sin-
gle and ensemble classifiers. It is surprising that single learn-
ing techniques outperform the other two techniques over the
German dataset, where the performances of single and ensemble
techniques are significantly different. However, although single
techniques slightly perform better than the ensemble ones on av-
erage, it is hard to conclude that single techniques are superior to
the ensemble ones since the ensemble techniques perform better
than single ones over the Australian and Japanese datasets.
To sum up, soft techniques have potential for better
bankruptcy prediction, in which developing ensemble classifiers
is relatively complicated that requires higher computational cost
than hybrid classifiers. For example, a number of multiple di-
versified classifiers need to be trained and combined. However,
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constructing hybrid prediction models, especially by combining
clustering analysis with single classifiers, is relatively easy, and
they can provide reasonable well prediction performances.
IV. DISCUSSION
The results that are shown in the previous sections indicate
several issues that have not been comprehensively examined
in the literature, providing opportunities for future researchers.
They can be divided into feature selection, model development,
baseline models, and benchmark datasets.
A. Feature Selection
First of all, feature selection is a critical task for data prepro-
cessing, which has considerable potential to improve the pre-
diction performance of financial crises. Feature selection can be
defined as the process to choose a minimum subset of S features
from the original dataset of T features (S < T) so that the feature
space (i.e., the dimensionality) is optimally reduced.
Because of the lack of generally agreed upon variables (or
financial ratios) as the most representative features to predict
bankruptcy and credit scoring, collected variables must first be
examined to evaluate their importance and explanatory power in
the selected dataset. This step filters out noise features that re-
duce dimensionality, and enhance the performance of classifiers
over that of classifiers without feature selection.
Related studies have shown that performing feature selec-
tion can make prediction models provide better results than the
ones without feature selection, such as [86], [90], [94], [116],
[117], [128], [135], [140], and [160]. However, since there are
many feature selection algorithms in the literature, currently it
is unknown which feature selection method performs best with
many datasets. In other words, statistical-based methods, such as
LIN et al.: MACHINE LEARNING IN FINANCIAL CRISIS PREDICTION: A SURVEY
TABLE X
RELATIONSHIP BETWEEN DATASETS, PREDICTION ACCURACY, AND FEATURE SELECTION
principal component analysis and stepwise, should be compared
with intelligent methods, such as genetic algorithms.
B. Model Development
The second issue is the development of prediction mod-
els. Because many related studies have illustrated the superi-
ority of machine-learning techniques over statistical methods,
one should consider machine-learning-based classification al-
gorithms for the prediction of financial crises to obtain better
results. However, combining both types of techniques would
be a reasonable solution, as they could complement each other
for classifier ensembles or hybrid classifiers rather than com-
pete with each other. This leads to a related issue that involves
the examination of performance, combining homogeneous and
heterogeneous classification techniques.
On the other hand, since the hybrid models by combining
clustering analysis with single classification techniques perform
better than single classifiers and classifier ensembles over three
public datasets (cf., Section III-D), one possible hybrid approach
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431
can be based on combining one specific clustering algorithm
with classifier ensembles. That is, the second component of the
hybrid model is based on classifier ensembles rather than one
specific single classifier.
Furthermore, it is worth examining the impact of performing
feature selection on prediction performance of single classifiers,
classifier ensembles, and hybrid classifiers. In other words, sin-
gle classifiers with the best feature selection algorithm may
achieve reasonable well performance or perform comparable
with classifier ensembles and hybrid classifiers followed by
feature selection.
Since DT/MLP ensembles and GA + SVM/MLP and SOM
+ MLP are the most highly developed in the literature (cf.,
Section II-C3), one future direction is to conduct a comprehen-
sive study of comparing these classifier ensembles and hybrid
classifiers.
C. Baseline Models
To conduct a reliable experimental study, it is important to de-
termine a baseline(s) with which to validate proposed classifiers.
432 IEEE TRANSACTIONS ON SYSTEMS, MAN, AND CYBERNETICS—PART C: APPLICATIONS AND REVIEWS, VOL. 42, NO. 4, JULY 2012
TABLE XI
COMPARISONS OF BANKRUPTCY-PREDICTION MODELS BY SINGLE, ENSEMBLE,
AND HYBRID MACHINE-LEARNING TECHNIQUES
Fig. 5. Average accuracy of the bankruptcy-prediction models by single, en-
semble, and hybrid machine-learning techniques.
Because MLP and SVM are the two most widely developed sin-
gle classifiers in the literature (cf., Section II-B), and MLP, DT,
and SVM are the three most popular baselines with the excep-
tion of statistical models (cf., Section III-A), future studies must
choose some of these classifiers for comparison.
However, since many recent prediction models are based on
soft classification techniques, comparing these models with sin-
gle classification techniques is inadequate. This is because soft
classification techniques have shown their outperformance over
single methods (cf., Section II-C). Therefore, it would be advis-
able to consider some soft classifiers, such as DT/MLP ensem-
bles, GA + SVM/MLP, and SOM + MLP in the experimental
design in order to reliably assess the performance of the pro-
posed classifiers.
D. Benchmark Datasets
In addition to the consideration of feature selection and devel-
opment of prediction models by soft classification techniques,
selection of suitable datasets for experiments must be carefully
considered. In general, there are two strategies to select the
benchmark datasets. The first one is based on the adoption of
public datasets, such as the Australian, German, and Japanese
datasets, and the second one is for specific real cases collected
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individually. However, very few studies considered both strate-
gies for their experiments.
We believe that it is always better to use a number of differ-
ent datasets for model evaluation instead of limiting the study
to only one specific dataset. Moreover, the approach to eval-
uation using training and testing sets of different proportions
and/or cross validation is also important. This would increase
the likelihood to fully understand the value and performance
of the proposed classifiers and to increase the reliability of the
conclusions made according to these evaluation results.
V. CONCLUSION
This study has reviewed 130 related studies between 1995 and
2010 on the prediction of bankruptcy and credit scoring, using
machine-learning techniques. Unlike previous review articles,
this paper has reviewed more recent papers including those using
a variety of soft classification techniques for the prediction of
financial crises. More specifically, this statistical review has
compared related studies in terms of single and soft classifiers,
baseline classifiers, and datasets.
The development of models for the prediction of financial
crises using machine learning still has a long way to go. Soft
classification techniques appear to be the direction for future
research as core techniques that are used in the development
of prediction models. These include numerous techniques that
involve classifier ensembles and hybrid classifiers.
In addition to the development of prediction models, data pre-
processing for the selection of features is another area in which
prediction performance has to be improved. Determining base-
line classifiers with which to compare models is an important
issue to demonstrate the robustness of developed classifiers. For
example, both single and soft classifiers can be used as base-
lines. Another important issue is to carefully select the dataset(s)
for experiments. More specifically, using various datasets with
different proportions of training and testing sets and cross vali-
dation is likely to provide a better understanding of the perfor-
mance of the classifiers and provide more reliable conclusions.
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Wei-Yang Lin received the B.S.E.E. degree from Na-
tional Sun Yat-Sen University, Kaohsiung, Taiwan, in
1994, and the M.S.E.E. and Ph.D. degrees from the
University of Wisconsin-Madison, Madison, in 2004,
and 2006, respectively.
Since 2006, he has been with the Department
of Computer Science and Information Engineering,
National Chung Cheng University, Chiayi County,
Taiwan, where he is currently an Assistant Profes-
sor. His research interests include computer vision,
biometric authentication, and multimedia signal
processing.
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Ya-Han Hu received the Ph.D. degree in informa-
tion management from National Central University,
Taoyuan County, Taiwan in 2007.
He is currently an Assistant Professor with the
Department of Information Management, National
Chung Cheng University, Chiayi County, Taiwan.
His current research interests include data mining
and knowledge discovery, decision support systems,
and EC technologies. His research has appeared in
Data & Knowledge Engineering, Decision Support
Systems, and Journal of Information Science.
Chih-Fong Tsai received the Ph.D. degree from the
School of Computing and Technology, University of
Sunderland, U.K., in 2005.
He is currently an Associate Professor with the
Department of Information Management, National
Central University, Taoyuan County, Taiwan. He has
published more than 50 technical publications in jour-
nals, book chapters, and international conference pro-
ceedings. His current research interests include mul-
timedia information retrieval and data mining.
Dr. Tsai received the Highly Commended Award
(Emerald Literati Network 2008 Awards for Excellence) from Online Informa-
tion Review and the award for top ten cited articles in 2008 from Expert Systems
with Applications.