Financial Applications of Discriminant Analysis: A Clarification

In a recent article in this Journal Joy and Tollefson [10] (hereafter J&T) critically analyzed discriminant analysis and its application to bankruptcy analysis. The authors make several interesting points and provide a useful discussion of the application of this statistical technique in finance...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1978-03, Vol.13 (1), p.185-195
Main Authors: Altman, Edward I., Eisenbeis, Robert A.
Format: Article
Language:English
Subjects:
A priori knowledge
Bankruptcy
Coefficients
Cost estimation models
Discriminant analysis
Discriminants
Error rates
Estimate reliability
Modeling
Variable coefficients
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Summary:In a recent article in this Journal Joy and Tollefson [10] (hereafter J&T) critically analyzed discriminant analysis and its application to bankruptcy analysis. The authors make several interesting points and provide a useful discussion of the application of this statistical technique in finance. There are, however, three aspects of their presentation which need further elaboration. These relate to their discussions of (1) the difference between the stability of the discriminant model and its predictive ability, (2) the alternative methods of making inferences about the relative discriminatory power of variables, and (3) the reference statistics to use in assessing classification efficiency. In commenting on these points we will make use of the data from the Altman [1] study as did J&T.
ISSN:0022-1090
1756-6916
DOI:10.2307/2330534