An insight into the experimental design for credit risk and corporate bankruptcy prediction systems

Over the last years, it has been observed an increasing interest of the finance and business communities in any application tool related to the prediction of credit and bankruptcy risk, probably due to the need of more robust decision-making systems capable of managing and analyzing complex data. As a result, plentiful techniques have been developed with the aim of producing accurate prediction models that are able to tackle these issues. However, the design of experiments to assess and compare these models has attracted little attention so far, even though it plays an important role in validating and supporting the theoretical evidence of performance. The experimental design should be done carefully for the results to hold significance; otherwise, it might be a potential source of misleading and contradictory conclusions about the benefits of using a particular prediction system. In this work, we review more than 140 papers published in refereed journals within the period 2000–2013, putting the emphasis on the bases of the experimental design in credit scoring and bankruptcy prediction applications. We provide some caveats and guidelines for the usage of databases, data splitting methods, performance evaluation metrics and hypothesis testing procedures in order to converge on a systematic, consistent validation standard.