On the Financial Applications of Discriminant Analysis

In recent years the application of discriminant analysis to two-category (dichotomous) classification problems in empirical financial research has substantially increased. However, these studies have given relatively little attention to design and interpretation difficulties associated with discrimi...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1975-12, Vol.10 (5), p.723-739
Main Authors: Joy, O. Maurice, Tollefson, John O.
Format: Article
Language:English
Subjects:
Applications
Bankruptcy
Discriminant analysis
Discriminants
Efficiency metrics
Finance
Financial
Financial ratios
Inference
Probabilities
Proportions
Randomness
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Summary:In recent years the application of discriminant analysis to two-category (dichotomous) classification problems in empirical financial research has substantially increased. However, these studies have given relatively little attention to design and interpretation difficulties associated with discriminant analysis. Consequently, the conclusions and generalizations that can be drawn from such studies are frequently tenuous and questionable. This paper's purpose is to discuss the methodology of discriminant analysis. While the paper is oriented toward financial applications of discriminant analysis, our discussion is not peculiar to finance. Furthermore, many of the methodological issues we address are relevant to the general problem of developing and testing dichotomous classification models and arise whether model developing is by discriminant analysis or some other method.
ISSN:0022-1090
1756-6916
DOI:10.2307/2330267