An application of the cox proportional hazards model to bank failure

The purpose of this study is to present the Cox proportional hazards model and to apply this model to the prediction of bank failures. The Cox model, which has been used extensively in biomedical applications, has not been previously employed in the finance literature. The principal advantage of the...

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Bibliographic Details
Published inJournal of banking & finance Vol. 10; no. 4; pp. 511 - 531
Main Authors Lane, William R., Looney, Stephen W., Wansley, James W.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.12.1986
North-Holland Pub. Co
Elsevier Sequoia S.A
Subjects
Bank failures
Banking industry
Discriminant analysis
Economic models
Economic theory
Regression analysis
Studies
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Summary:The purpose of this study is to present the Cox proportional hazards model and to apply this model to the prediction of bank failures. The Cox model, which has been used extensively in biomedical applications, has not been previously employed in the finance literature. The principal advantage of the Cox model over other classification techniques is that it models the expected time to failure. Results of the study indicate that total classification accuracy of the Cox model is similar to that of discriminant analysis, although the Cox model produces somewhat lower type I errors. In a comparison of actual and predicted times to failure, the Cox model tends to identify bankruptcies prior to the actual failure date.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(86)80003-6