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Omega 33 (2005) 85 – 91
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01 A quadratic interval logit model for forecasting bankruptcy

24-Aug-19

Fang-Mei Tsenga;∗ , Lin Linb

laudiu Clement

a Department of International Business, Yuan Ze University, 135, Yuan-Tung Road, Chung-Li, Taoyuan 320, Taiwan
b Department of Banking and Finance, National Chi-Nan University, 1 University Road, Puli 545, Nantou Hsien, Taiwan
Received 2 October 2003; accepted 12 April 2004

Abstract
This paper proposes a quadratic interval logit model (or quadratic interval logistic regression analysis) based on a quadratic
programming approach to deal with binary response variables. This model combines the advantages of logit (or logistic
regression) and Tanaka’s quadratic interval regression model. As a demonstration, we applied this model to forecasting
corporate distress in the UK. The results show that this model can support the logit model to discriminate between groups,
and it provides more information to researchers.
? 2004 Elsevier Ltd. All rights reserved.

Keywords: Bankruptcy forecasting; Fuzzy regression; Logit model

1. Introduction between the independent variables, which seldom holds.

In bankruptcy forecasting, early attempts to use ratio anal-
ysis to predict corporate failure are associated with Beaver
02 [1], who proposed the frameworks for univariate analysis.
Subsequently Altman [2,3] used multivariate discriminant
laudiu Clement analysis (MDA) to predict corporate failure. Their method-
ologies became the main stream, and were amended to up-
grade the model prediction accuracy. Ta:er [4] used UK
data in a Z-score model, predicting 99% of corporate fail-
ures one year prior to bankruptcy. The intuitive advantage
of using MDA is that the entire pro=le of the characteris-
tics under investigation is included, along with their interac-
tions. It was also noted by Altman [3,5] that MDA reduces
the analyst’s spatial dimensionality by given cut-o> points.
Largely due to its ease of use and interpretation, this has
been the model of choice in bankruptcy prediction for many
years [24,27].
The other popular functional form used by bankruptcy re-
searchers is the logit model (logistic regression model). Lin-
ear discriminant analysis assumes full linear compensation
∗ Corresponding author. Tel.: +886-3-4638800-691;
fax: +886-3-4633824.
E-mail address: fmtseng@saturn.yzu.edu.tw (F.-M. Tseng).
Quadratic discriminant analysis proposes a more general re-
lationship, which is a quadratic function. However, both lin-
ear and quadratic discriminant analyses are sensitive to de-
viation from multivariate normality [7,19,23,28]. The logit
model does not assume multivariate normality, but the logit
approach does give a crisp relationship between explana-
tory and response variables based on the given data from a
statistical viewpoint.
However, if a phenomenon under consideration does not
have stochastic variability but is also uncertain in some
sense, it is more natural to seek a fuzzy functional relation-
ship for the given data, which may be either fuzzy or crisp.
That is to say, a fuzzy phenomenon should be modeled by a
fuzzy functional relationship. Fuzzy regression analysis was
=rst proposed by Tanaka et al. [9,10], using a fuzzy linear
system as a regression model. Since membership functions
of fuzzy sets are often described as possibility distributions,
this approach is usually referred to as possibilistic regres-
sion analysis [6,12,25,26]. Tanaka and Lee [13] proposed
interval regression analysis based on a quadratic program-
ming approach. This quadratic programming approach gives
more diverse spread coeHcients than a linear programming
approach as well as integrating both the property of central
tendency in least square and the possibility property in fuzzy
regression. This current paper proposes a quadratic interval

0305-0483/$ - see front matter ? 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.omega.2004.04.002
86 F.-M. Tseng, L. Lin / Omega 33 (2005) 85 – 91

logit model that combines the logit model and quadratic in-
terval regression to solve a fuzzy relationship between ex-
= ln P1 − ln P2 . This
planatory and response variables. From the results of prac-
tical application to the bankruptcy prediction of UK compa-
nies, the proposed method makes good forecasts and appears
+ x , it follows that
to be an appropriate tool.
This paper is organized as follows: concepts of the logit
model and quadratic interval regression model are reviewed
in Section 2. In Section 3, the quadratic interval logit model
is formulated and proposed. The quadratic interval logit
model is applied to forecasting the corporate distress of UK
companies in Section 4, and =nally conclusions are dis-
cussed in Section 5.
.
It is observed that the slope coeHcients are unchanged and
only the constant term increases by
simple modi=cation of the original logit model is an attrac-
tive feature of CMLE.
Now, if x b =
exp(x b)
j = : (5)
1 + exp(x b)
Since Eq. (5) is also logistic, the normal procedure can be
used to generate the MLEs. Comparing this to Eq. (1), which
is based on random sampling, it is clear that the parameters
are una>ected, while the constant term di>ers by a known
value,

2.2. Quadratic interval regression model

2. Logit and quadratic interval regression models
The basic idea of fuzzy regression theory is that the resid-
2.1. Basic logit model
uals between estimators and observations are not produced
by measurement errors, but rather by the parameter uncer-
Since the outcomes are between two discrete alternatives,
tainty in the model, and a possibility distribution is used
fail and non-fail, bankruptcy classi=cation is an appropriate
to deal with practical observations. A generalized model of
application for a binary choice model. Logit and probit mod-
fuzzy linear regression is as follows
els are commonly used in such qualitative response studies,
frequently giving very similar results in empirical research.

n

However, in this study, some modi=cation to the basic logit yj = A0 + A1 x1j + · · · + An x nj = Ai xij = xj A; (6)
i=1
speci=cation is required because of the random sampling as-
sumption of conditional probability analysis. In the major- where xj = (1; x1j ; : : : ; x nj ) is a real input vector of inde-
ity of bankruptcy prediction models, state-based sampling is pendent variables, n is the number of variables and A =
used since this gives a higher information content than that (A0 ; : : : ; An ) represents a vector of the fuzzy parameters in
resulting from estimation based on random samples [14,15]. the model. Instead of using a crisp value, the ith fuzzy pa-
Thus, Maddala’s [16] separate-sample logistic discrimina- rameter bi in the form of L-type fuzzy numbers of Dubois
tion model provides the conditional maximum likelihood and Prade [11], (i ; ci )L , the possibility distribution is
estimate (CLME) form of the modi=ed logit model [14,17].
The basic logit speci=cation is BNi (Ai ) = L{(i − Ai )=ci }; (7)

exp(x ) 1 where L is a membership function type. Fuzzy parameters
P(lj = 1) = j = = ; (1)
1 + exp(x ) 1 + exp(−x ) in the form of triangular fuzzy numbers are used

P(lj = 1) = 1 − j ; (2)  1 − |i − Ai | ; i − ci 6 Ai 6 i + ci ;

BNi (Ai ) = ci (8)
where P(lj = 1) is simply the probability that lj = 1; lj = 1 
 0;
denotes the occurrence that the jth behaviour of the exoge- otherwise;
nous variables, the superscript is denoted as the transpose
where BNi (Ai ) is the membership function of the fuzzy set,
operation and x = (1; x1 ; : : : ; x n ) is a real input vector of in-
which is represented by parameter Ai ; i is the center of
dependent variables. In the modi=ed form [14,17], P1 and
the fuzzy number, and ci is the width or spread around the
P2 are the proportions sampled from failed and non-failed
center of the fuzzy number.
groups, respectively [18,19]. The speci=cation can be stated
According to Zadeh’s extension principle [20], the mem-
P1 × exp(x ) bership function of the fuzzy number yj =xj A can be de=ned
j = ; (3)
P2 + P1 × exp(x ) by a membership function using pyramidal fuzzy parameter
b as follows:
where if P = P2 =P1 and
= ln P1 − ln P2 , or P = exp(−
),
then, Y˜ (yj )
P1 × exp(x ) exp(x ) 
j = = 
 1 − |yj − xj |=c  |xj | for xj = 0;
P2 + P1 × exp(x ) P + exp(x ) 
= 1 for xj = 0; yj = 0; (9)
exp(
+ x ) 

= : (4) 
1 + exp(
+ x ) 0 for xj = 0; yj = 0;
 F.-M. Tseng, L. Lin / Omega 33 (2005) 85 – 91 87

where  and c denote vectors of model parameter values 3. Quadratic interval logit model
and spreads, respectively, for all model parameters; and j
denotes the jth observation, j = 1; 2; : : : ; m. The quadratic interval logit model is constructed together
Finally, this method uses the criterion of minimizing the with logit and Tanaka’s interval regression [13].
total vagueness and the sum of squared distances between In order for the logit model to meet conventional simple
the estimated output centers and the observed output, S, regression, Eq. (5) was transformed as follows:
 
which rePects both properties of least squares and possi- j
bilistic approaches [13]. zj = xj b = log : (13)
1 − j


m
minimize S = k1 (yj − xj )2 The transformed response Eq. (13) is denoted as the logit
j=1
response function. From Eq. (13), note that the logit mean
response P(x) has a range from −∞ to +∞ , as x ranges


m
between −∞ to +∞.
+k2 c  |xj xj | c; (10) A quadratic interval logit model is described with a fuzzy
j=1
parameter:

where mj=1 |xj xj | is a (n + 1) × (n + 1) symmetric pos- zj = A0 + A1 x1j + · · · + An x nj
itive de=nite matrix and k1 and k2 are weight coeHcients.
A matrix is positive de=nite if and only if all eigenvalues = 0 ; c0  + 1 ; c1 x1j + · · · + n ; cn x nj : (14)
of the matrix are positive. The weight coeHcients k1 and
According to Eq. (9) and using the extension principle,
k2 in Eq. (10) have an important role in formulating fuzzy
the membership function of the fuzzy number zj = xj Aj can
regression models. For example, if we use a large value k1
be de=ned by a membership function using pyramidal fuzzy
compared to k2 , a more central tendency would be expected,
parameter A, as follows:
i.e., the obtained central regression line would tend to be
the regression line obtained by least squares regression. On P (zj )
the contrary, if we use a large value k2 compared to k1 , we 
focus on reducing the fuzziness of the model. 
 1 − |zj − xj |=c  |xj | for xj = 0;

At the same time, this approach also takes into account = 1 for xj = 0; P(x) = 0;
the condition that the membership degree of each observa- 


tion yj is greater than an imposed threshold possibility as 0 for xj = 0; P(x) = 0;
h; h ∈ [0; 1]. This criterion simply expresses the fact that the (15)
fuzzy output of the model should ‘cover’ all the data points
where  and c denote vectors of model parameter values
y1 ; y2 ; : : : ; ym to a certain h level. The selection of the h level
and spreads, respectively, for all model parameters; and j
value will inPuence the widths, c, of the fuzzy parameters.
denotes the jth observation, j = 1; 2; : : : ; m.

(yj ) ¿ h ∀j = 1; 2; : : : ; m: (11) Finally, this method uses the criterion of minimizing
the total vagueness and sum of squared distances between
where the index j denotes the jth observation. Then, the the estimated output centers and the observed output, S,
problem of =nding the interval regression parameters is for- de=ned as
mulated by Tanaka and Lee as a quadratic programming
m
problem [13]: minimize S = k1 (zj −  xj )2
j=1


m
 2


m
 
minimize S = k1 (yj −  xj ) + k2 c |xj xj | c


m
j=1 j=1 +k2 c  |xj xj | c: (16)
j=1
subject to
Simultaneously, this approach takes into account the con-
xj  + (1 − h)c  |xj | ¿ yj ; j = 1; 2; : : : ; m; dition that the membership degree of each observation zj is
greater than an imposed threshold possibility as h; h ∈ [0; 1].
xj  − (1 − h)c  |xj | 6 yj ; j = 1; 2; : : : ; m;
This criterion simply expresses the fact that the fuzzy output
c ¿ 0; (12) of the model should ‘cover’ all the data points z1 ; z2 ; : : : ; zm
to a certain h level. The selection of the h level value will
where  =(0 ; 1 ; : : : ; n ) and c  =(c0 ; c1 ; : : : ; cn ) are vectors inPuence the widths, c, of the fuzzy parameters.
of unknown variables.
P (zj ) ¿ h ∀j = 1; 2; : : : ; m: (17)
In the fuzzy regression model above, the response variable
y is a continuous variable. Finally, based on these concepts The index i refers to the number of nonfuzzy data used
we suggest a quadratic interval logit regression model to in constructing the model. Then, the problem of =nding the
deal with a binary response variable. fuzzy regression parameters was formulated by Tanaka and
88 F.-M. Tseng, L. Lin / Omega 33 (2005) 85 – 91

Watada as a linear programming problem Table 1

m

m Multivariate logit (t stat)
minimize S = k1 (zj −  xj )2 + k2 c  |xj xj | c
Variables Estimated coeHcients
j=1 j=1

subject to Constant 0.33 (0.82)

Working capital/Op expenditure (x1 ) −0.9728 (−2.55)
xj  + (1 − h)c  |xj | ¿ zj ; j = 1; 2; : : : ; m; After-tax pro=t/total assets (x2 ) −0.4155 (−3.03)
UCash/total liabilities (x3 ) −0.1778 (−2.65)
xj  − (1 − h)c  |xj | 6 zj ; j = 1; 2; : : : ; m;

c ¿ 0; (18)
 
where  = (0 ; 1 ; : : : ; n ) and c = (c0 ; c1 ; c2 ; : : : ; cn ) are removed from widely accessible databases, and the number
vectors of unknown variables. of mergers during the 1990s led to further reductions. The
The procedure of the quadratic interval logit model is as failed =rms were identi=ed by investigating the outcomes
follows: of all =rms that were dropped from DATASTREAM to see
Step 1: Fit the logit model by using the available infor- whether their removal was due to merger, acquisition, name
mation sets of observations, i.e., input data is considered change or bankruptcy. Based on the state-based sampling
nonfuzzy. According to the concept derived by Savic and criteria, 45 of the 551 non-bankrupt =rms were selected ran-
Pedrycz [21], the result of this step is that the optimum so- domly on the basis of having more than nine =scal years
lution of the parameter ∗ = (0∗ ; 1∗ ; 2∗ ; : : : ; n∗ ) and j∗ , is of data.
used as one of the input data sets in step 2. According to the quadratic interval logit model described
Step 2: Calculate the logit mean function P((x)). Substi- above, we construct the model in the following steps.
tuting the result of the parameters from step 1 into Eq. (13), Step 1: Fit the logit model: Lin [18,22] used the same
we can obtain the estimated logit mean function zj ; ∀j = database and a logit model to bankruptcy prediction. In
1; 2; : : : ; m. that study, three important =nancial ratios, working capi-
Step 3: Determine the minimal fuzziness by using the tal/op expenditure (x1 ), After-tax Pro=t/Total Assets (x2 )
criteria Eq. (18) and ∗ = (0∗ ; 2∗ ; : : : ; n∗ ). and UCash/Total Liabilities (x3 ), were demonstrated to be
The number of constraint functions is the same as the the critical independent variables, with the results as shown
number of observations, which is the concept derived by in Table 1.
Savic and Pedrycz [21]. The quadratic interval logit model This model needs to be adjusted to correct for any
is bias that may arise from using statebased sampling. From
zj = 0 ; c0  + 1 ; c1 xij + · · · + n ; cn x nj : (19) Eq. (4), Maddala’s adjustment,
   
Simultaneously, Eq. (31) can be represented as follows: 32 45

= ln P1 − ln P2 = ln − ln = 1:09
exp[ 0 ; c0  + 1 ; c1 x1 + · · · + n ; cn x n ] 32 551
j = ;
1 + exp[ 0 ; c0  + 1 ; c1 x1 + · · · + n ; cn x n ] means that the constant term becomes −1:09−0:33=−1:42
(20) and the best-=tting model was
where zj = log[j =1 − j ]; i is the center of fuzzy number, exp(1:42 − 0:9728x1 − 0:4155x2 − 0:1778x3 )
ˆ = :
and ci the width or spread around the center of fuzzy number. 1 + exp(1:42 − 0:9728x1 − 0:4155x2 − 0:1778x3 )
(21)

4. Empirical results The optimal cut-o> points were approximately equal to

4.1. Bankruptcy prediction in UK companies
In order to demonstrate the appropriateness and e>ective-
ness of the proposed method, consider the following data for
bankruptcy prediction. The main =nancial data sources are
DATASTREAM and FT EXTEL Company Research, from
which 904 UK public companies in the general industrials
sector were selected. Of these, 353 companies were either
acquired or failed between March 1985 and March 1994.
Of the failed =rms, 32 had suHcient =nancial data to be in-
cluded in the =nal sample. The data on failed =rms were
taken from the =nancial reports one year prior to failure.
The sample was limited because failed =rms are generally
0.639 (refer to [22]) and the proportion of correct classi=-
cation for this model was 78%, that is 17 companies were
mistakenly classi=ed, as shown by the results in Table 2.
Among the 17 companies that were misclassi=ed, 11 were
non-failed companies and 6 were failed ones. Therefore,
78% is the total correction rate, with 81.25% as the cor-
rect classi=cation rate for failed samples and 75.55% for
non-failed ones.
Step 2: Calculate the logit mean function z
We apply Eq. (13) to calculate z.ˆ
Step 3: Determine the minimal fuzziness.
According to Eq. (18), and by setting (0 ; 1 ; 2 ; 3 ) =
(1:42; −0:9728; −0:4155; −0:1778) h = 0, the following
quadratic interval model is obtained using the LINGO
 F.-M. Tseng, L. Lin / Omega 33 (2005) 85 – 91 89

Table 2
The results of modi=ed logit model and quadratic interval logit model

No. Company name Failure Modi=ed logit model Quadratic interval logit model

Lower bound Upper bound

1 DUNTON GROUP 0.00 3.13E-06 6.32E-09 0.0015

2 BANNER HOMES 0.00 2.13E-05 2.29E-08 0.019
3 DOLPHIN PACKAGING 0.00 8.33E-05 9.02E-08 0.0715
4 ROBINSON,THOMAS 0.00 0.0001 9.21E-07 0.0140
5 TITON HOLDINGS 0.00 0.0002 1.13E-06 0.0422
6 IPECO HOLDINGS 0.00 0.0008 4.06E-06 0.1263
7 AMSTRAD 0.00 0.0012 8.05E-06 0.1531
8 FAIREY GROUP 0.00 0.0017 2.51E-05 0.1050
9 C.A. SPERATI 0.00 0.0087 0.0001 0.3481
10 A.I.M.GROUP 0.00 0.0226 0.0011 0.3183
11 FIRST TECHNOLOGY 0.00 0.0306 0.0011 0.4860
12 HORNE, ROBERT 0.00 0.0320 0.0017 0.3895
13 DOM HOLDINGS 0.00 0.0326 0.0024 0.3243
14 ZYGAL DYNAMICS 0.00 0.0330 0.0032 0.2668
15 STC 0.00 0.0407 0.0033 0.3501
16 HAWKER SIDDELEY 0.00 0.0881 0.0092 0.5013
17 BEAZER 0.00 0.0993 0.0104 0.5362
18 FLARE GROUP 0.00 0.1346 0.0110 0.6847
19 MARSHALL’S UNIVERSAL 0.00 0.1694 0.0243 0.6253
20 HEWETSON 0.00 0.2885 0.0478 0.7662
21 MICROVITEC 0.00 0.3362 0.0697 0.77400786
22 SPRING RAM CORP. 0.00 0.3476 0.0646 0.8042
23 RECORD HOLDINGS 0.00 0.3819 0.0863 0.8016
24 MULTITONE ELECTRONICS 0.00 0.3872 0.0950 0.7918
25 BOSTROM 0.00 0.3963 0.11578 0.7670
26 HORNE, ROBERT. 0.00 0.4078 0.1028 0.8054
27 TEXTURED JERSEY 0.00 0.4143 0.1092 0.8033
28 DOUGLAS, ROBERT M. 0.00 0.4446 0.119 0.8258
29 BARDSEY 0.00 0.4581 0.1419 0.8120
30 LAMONT HLDGS 0.00 0.4999 0.1793 0.8206
31 PLASTIC CONSTRUCTIONS 0.00 0.5374 0.2364 0.8134
32 ROCKWARE GROUP 0.00 0.5413 0.1982 0.8493
33 LAWRENCE, WALTER 0.00 0.5805 0.2701 0.8380
34 SERIF 0.00 0.5884 0.2553 0.8563
35 SOUNDTRACS 0.00 0.6526 0.4659 0.8018
36 CELESTION INDS 0.00 0.6722 0.3975 0.8644
37 BARDSEY 0.00 0.6724 0.3708 0.8772
38 CASTLE MILL INTL 0.00 0.6763 0.3764 0.8785
39 TUNSTALL GROUP 0.00 0.7279 0.4837 0.8843
40 JAGUAR 0.00 0.7444 0.5017 0.8939
41 COXMOORE 0.00 0.7477 0.5176 0.8912
42 RAMUS HOLDINGS 0.00 0.7500 0.5154 0.8943
43 JOHN HAGGAS 0.00 0.7944 0.6182 0.9021
44 ROBINSON, THOMAS 0.00 0.8432 0.7271 0.9157
45 DOUGLAS, ROBERT M. 0.00 0.8821 0.8064 0.9307
46 EUCALYPTUS PULP 1.00 0.0733 0.0049 0.5574
47 NORTON GROUP 1.00 0.2925 0.0416 0.7974
48 FALCON INDUSTRIES 1.00 0.4903 0.1525 0.8372
49 LDH GROUP 1.00 0.5973 0.2602 0.8621
50 THOMSON T-LINE 1.00 0.5974 0.2616 0.8613
51 CHEQUERS GP. 1.00 0.6271 0.2950 0.8711
52 FOBEL INTERNATIONAL 1.00 0.7031 0.4138 0.8882
53 PARKFIELD GROUP 1.00 0.7688 0.5971 0.8818
54 TALBEX 1.00 0.7694 0.6316 0.8666
55 MEMORY COMPUTER 1.00 0.7986 0.6554 0.8921
90 F.-M. Tseng, L. Lin / Omega 33 (2005) 85 – 91

Table 2 (continued)

No. Company name Failure Modi=ed logit model Quadratic interval logit model

Lower bound Upper bound

56 RYAN INTERNATIONAL 1.00 0.8075 0.6430 0.9071

57 NEIL & SPENCER 1.00 0.8101 0.7405 0.8644
58 SOUND DIFFUSION 1.00 0.8864 0.8238 0.9287
59 FERRANTI INTL. 1.00 0.8936 0.8703 0.9131
60 BARHAM GROUP 1.00 0.9272 0.8787 0.9573
61 PLASTISEAL 1.00 0.9295 0.9108 0.9445
62 TOUCHSTONE GP. 1.00 0.9299 0.92481 0.9346
63 HARCOURT GP. 1.00 0.9410 0.9394 0.9426
64 MILLER, STANLEY 1.00 0.9478 0.9461 0.9495
65 MCLAUGHLIN & HARVEY 1.00 0.9683 0.9354 0.9847
66 AT TRUST 1.00 0.9820 0.9727 0.9881
67 SD-SCICON 1.00 0.9832 0.9659 0.9918
68 POLLY PECK INTERNATIONAL 1.00 0.9898 0.9663 0.9970
69 SPICE 1.00 0.9904 0.9740 0.9965
70 SALE TILNEY 1.00 0.9930 0.9789 0.9977
71 HARLAND SIMON GROUP 1.00 0.9993 0.9999 0.99999
72 CONDER GROUP 1.00 0.9995 0.9999 0.9999
73 WILLAIRE GROUP 1.00 0.9999 0.9999 0.9999
74 TERN 1.00 0.9999 0.9999 0.9999
75 ASTRA HOLDINGS 1.00 0.9999 0.9999 0.9999
76 WEST INDUSTRIES 1.00 1 0.9999 0.9999
77 STORMGARD 1.00 1 0.9999 0.9999

package software [8]. The result of the interval sample clas- Table 3
si=cation is shown in Table 2. Comparisons of logit model and quadratic interval logit model

z = (1:4200; 0:8572) + (−0:9728; 0:3800)x1 Logit Quadratic

+(−0:4155; 0:2408)x2 + (−0:1778; 0:1007)x3 ; (22)
ˆ
where z = . Theory
1 − ˆ
This implies that if the intervals of the companies are in-
cluded the optimal cut-point, we cannot verify whether the
companies are failed or not. That is, companies where the
lower and upper bounds of the quadratic interval logit model
were less than the optimal cut-point of 0.639 were clas-
si=ed as non-bankrupt. Correspondingly, companies where
the lower and upper bounds of the quadratic interval logit
model were larger than 0.639 were classi=ed as bankrupt
companies. The intervals where the quadratic interval logit
model included 0.639 were not classi=ed. From Table 2,
only 3 companies were mistakenly classi=ed, which the logit
model were mistakenly classi=ed too, 41 were correctly
classi=ed and 33 companies cannot be discriminated. Thus,
the researchers need more information to discriminate be-
tween these 33 companies. Therefore, the quadratic interval
logit model supports the logit model to discriminate between
groups and provides more information to researchers.
4.2. Comparison
A comparison of the logit model and the quadratic interval
logit model is described as following and shown in Table 3.
model interval
logit model
Probability theory Possibility theory
The relationship of Crisp function Fuzzy function
input and output
Forecasted interval Con=dence interval Possibility distribution
The logit model is used for determining the relationship
between input and output data based on probability theory,
and the relationship between input and output is given in a
crisp function.
It can be seen that the logistic regression model based on
probability theory mirrors a statistical viewpoint, based on
the concept of occurrence. Thus, a large amount of input and
output data are generally needed to rePect the objectivity of
a phenomenon. But, for operations research problems, the
observations of input and output data are ordinarily not suf-
=cient, so the data should be selected by decision-makers,
rePecting their own preferences and experience. The
quadratic interval logit model obtained from the selected in-
put and output data rePects the concept of possibility, not of
probability. Thus, the possibilistic regression is formulated
from a position of obtaining the smallest interval system,
 F.-M. Tseng, L. Lin / Omega 33 (2005) 85 – 91
including all the selected data, so it can provide more infor-
mation on classi=cation.
5. Conclusions
Using the basic concepts of the logit model and Tanaka’s
quadratic interval regression model, we combine these to
present a new model (the quadratic interval logit model) and
apply it to forecast the bankruptcy in UK companies. From
the empirical results, we =nd that the quadratic interval logit
model can indicate which companies will not be bankrupt,
which ones will be bankrupt and which ones undetermined.
In the real world, the environment is uncertain and there are
sometimes limited numbers of companies for bankruptcy
prediction, so the quadratic interval logit model can support
the logit model to discriminate between groups and provide
more information to researchers.
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Annotations

A quadratic interval logit model for forecasting

bankruptcy
Tseng, Fang Mei; Lin, Lin

01 Claudiu Clement Page 1

24/8/2019 9:36
Citit 24/08/2019

02 Claudiu Clement Page 1

24/8/2019 9:37