Financial Prediction: Application of Logistic Regression with Factor Analysis

Logistic regression is a very common method in financial prediction. In order to establish the more effective model, the paper introduces factor analysis into logistic regression to overcome multiple co-linearity among variables and meanwhile retain useful information of original variables. The result shows that this model has better predictive capability. This suggests that for policymakers and others interested in prediction system, this may be a useful tool for forecast firm failure.