Vol. 2, No.

4 International Business Research

Applying Multiple Linear Regression and Neural Network to Predict Bank

Performance
Nor Mazlina Abu Bakar
Faculty of Business Management and Accountancy
University of Darul Iman Malaysia
21300 Kuala Terengganu, Malaysia
Tel: 60-9-665-3767 E-mail: [email protected]

Izah Mohd Tahir (Corresponding author)

Faculty of Business Management and Accountancy
University of Darul Iman Malaysia
21300 Kuala Terengganu, Malaysia
Tel: 60-9-665-3863 E-mail: [email protected]
Abstract
Globalization and technological advancement has created a highly competitive market in the banking and finance
industry. Performance of the industry depends heavily on the accuracy of the decisions made at managerial level. This
study uses multiple linear regression technique and feed forward artificial neural network in predicting bank
performance. The study aims to predict bank performance using multiple linear regression and neural network. The
study then evaluates the performance of the two techniques with a goal to find a powerful tool in predicting the bank
performance. Data of thirteen banks for the period 2001-2006 was used in the study. ROA was used as a measure of
bank performance, and hence is a dependent variable for the multiple linear regressions. Seven variables including
liquidity, credit risk, cost to income ratio, size, concentration ratio, inflation and GDP were used as independent
variables. Under supervised learning, the dependent variable, ROA was used as the target output for the artificial neural
network. Seven inputs corresponding to seven predictor variables were used for pattern recognition at the training phase.
Experimental results from the multiple linear regression show that two variables: credit risk and cost to income ratio are
significant in determining the bank performance. Two variables were found to explain about 60.9 percent of the total
variation in the data with a mean square error (MSE) of 0.330. The artificial neural network was found to give optimal
results by using thirteen hidden neurons. Testing results show that the seven inputs explain about 66.9 percent of the
total variation in the data with a very low MSE of 0.00687. Performance of both methods is measured by mean square
prediction error (MSPR) at the validation stage. The MSPR value for neural network is lower than the MPSR value for
multiple linear regression (0.0061 against 0.6190). The study concludes that artificial neural network is the more
powerful tool in predicting bank performance.
Keywords: Bank performance, Multiple linear regression, Neural Network, Malaysia
1. Introduction
Performance of the banking and finance industry plays a significant role in determining financial stability of any
country. Furthermore, globalization and technological advancement has created a highly competitive market. This
affects all organizations regardless of business emphasis. Banks are of no exception. They have to compete not only
among the local banks, but also among the foreign banks. The situation requires the needs for the decision makers in
this industry to be able to make an accurate decision. Mathematical and statistical tools can assist the decision makers to
be able to make accurate predictions and face challenges ahead.
In the literature, the most common statistical technique used in predicting bank performance is by using multiple linear
regression. The procedure is found to be very useful in determining bank profitability and consequently the performance
of banks. In this study, two different statistical techniques will be used to predict bank performance. Multiple linear
regression and artificial neural network techniques will be applied to Malaysian banks data.
Determinants of bank performance and the variables used are based from past literature and the results using both
methods are obtained. The predictive abilities of the two techniques are then compared to find the more powerful tool in
predicting bank performance.

176
International Business Research October, 2009

The objectives of this paper are to predict Malaysian bank performance using Multiple Linear Regression and Artificial
Neural Network and to evaluate which of this method is more powerful in predicting bank performance.
2. Literature Review
Researchers in banking and finance have indicated that bank performance is related to internal and external factors.
The internal factors relate to banks’ characteristics and external factors are described as the economic and legal
environment (Athanasoglou, Brissimis & Delis, 2008). Multiple linear regression is a very common statistical
technique used in finding the determinants of bank performance, for example Athanasoglou, Brissimis & Delis (2008),
Haron (2004) and Sanusi & Mohamed (2007). The analysis of multiple linear regression often produced low
coefficient of multiple determination, or R2 values and the presence of outliers is seen to be a very common problem
(Midi & Imon, 2006).
The performance measures are represented by return on assets (ROA), return on equity (ROE) and return on deposits
(ROD) from balance sheets (Sanusi & Mohamed, 2007). In a study on panel data in finding determinants of Islamic
bank profitability, Haron (2004) found that internal factors such as liquidity, total expenditures, funds invested and
profit sharing ratio have a significant effect on bank profitability. Interest rate, market share and bank size, described as
external effects, are also found to have the same effect in determining bank profitability.
A similar study in finding determinants of bank profitability, Sanusi & Mohamed (2007) found that bank’s
characteristics and the financial structure of a country are significant variables affecting bank profitability. They also
compared the results of fixed effects and random effects on the proposed model and observed low adjusted R2 values,
indicating a low proportion of variation in profitability explained by the significant independent variables.
Athanasoglou, Brissimis & Delis (2008), investigated the effect of bank-specific and industry-specific and
macroeconomics determinants on bank profitability in Greece. Two variables are found to have significant effect;
labour productivity growth (positive effect) and operating expenses (negative effect). Variables used by Athanasoglou,
Brissimis & Delis (2008), are adapted in this study to perform multiple linear regression on the Malaysian banks.
As with Artificial Neural Network, Vellido (1999) listed a variety of research that has used this method. In banking and
finance, artificial neural network has been used to predict banks and firms bankruptcy, predict credit card performance,
credit evaluation and also detect insurance fraud. Aiken (1999) used artificial neural network to forecast inflation and
concluded that neural network is able to fairly accurately forecast the consumer price index of a country.
The future of the artificial neural network in finance is discussed by Brunell & Folarin (1997). They have looked at the
promising performance of artificial neural network in debt risk assessment and its ability to improve on loan assessment.
They found that the artificial neural network has helped bank managers to evaluate good or bad credit risks by
estimating the likelihood that a firm’s or borrower’s ability to require additional capital through borrowing. The high
performance of artificial neural network in many areas of banking and finance has led to the application of the artificial
neural network to predict bank performance in this study.
The performance of artificial neural network has been compared with many other traditional statistical techniques. For
example, artificial neural network is compared with multiple linear regression (Nguyen & Cripps, 2001 and Arulsudar,
Subramaniam & Murthy, 2005), discriminant analysis and logistic regression (Leshno & Spector, 1996), decision trees
and logistic regression (Delen, Walker & Kadam, 2004), stepwise regression and ridge regression (Chokmani,Quarda,
Hamilton, Hosni & Hugo, 2008), logistic regression (Zhang, Hu, Patuwo & Indro, 1997). The artificial neural network
has outperformed the traditional methods in all of these studies. Specifically, the artificial neural network is found to
have better performance than multiple regression analysis when moderate to large data sample size is used (Nguyen &
Cripps, 2001).
Comparison of artificial neural network and multiple linear regression has also been done in various fields of study.
Artificial neural network is extensively being applied in predicting bankruptcy. Leshno & Spector (1996) have
compared artificial neural network with multivariate discriminant analysis and logistic regression in their study on
bankruptcy using a limited number of firms. Prediction capabilities of artificial neural network are found to be more
accurate than the classical discriminant analysis and logistic regression. They also concluded that an ample number of
examples must be provided for neural network to perform at its optimum. Another study in predicting bankruptcy is by
Boritz & Kennedy (1995) who examined different types of artificial neural network and compared against other
bankruptcy prediction techniques such as discriminant analysis, logit and probit techniques. Performance of the
artificial neural network is found to be affected by the choice of variables. Although the artificial neural network has
outperformed the traditional methods, the later has advantages of being easy to understand and use.
Nguyen & Cripps (2001) examined the performance of various artificial neural network architectures. Standard back
propagation is found to perform better than other neural network architectures. The network performance is also found
to improve with training size.

177
Vol. 2, No. 4 International Business Research

The applications of neural network in various fields of study have showed positive and promising results. Multiple
linear regression is a very popular method but the method is non-robust, in which influential outliers can effect
regression results significantly. Researchers in the field of robust statistics indicate that real data may contain about 1 to
10% outliers (Midi & Imon, 2006). The predictive ability and robustness of artificial neural network is an eye-catcher.
Therefore, in this study, multiple linear regression and artificial neural network are used to predict bank performance
and results of both methods are then compared. The results can then be of importance to predict bank performance in
Malaysia.
3. Data Description and Methodology
A sample data set consisting of 13 banks for the period of 2001 – 2006 was randomly selected from a list of Malaysian
banks obtained from Bank Negara Malaysia. Data for all variables, except for GDP and CPI, were collected from the
BANKSCOPE database. Data for chosen variables were selected, calculated and transferred into an Excel spreadsheet.
Data for Gross Domestic Product (GDP) and Consumer Price Index (CPI) were obtained from the Bank Negara
Malaysia official website.
Predictor variables found to be significant in the banking and finance literature were adapted into the study. Return on
assets (ROA) was used as a measure of bank performance and seven predictor variables were chosen to be analyzed.
The chosen variables are listed in Table 1.
3.1 Multiple Linear Regression Model
Multiple linear regression analysis is a technique for modelling the linear relationship between two or more variables. It
is one of the most widely used of all statistical methods. In banking and finance literature, regression analysis is a very
common method used to find the determinants of bank performance.
The general linear regression model, with normal error terms, simply in terms of X variables is shown in Equation 1.
Yi E 0  E 1 X i1  E 2 X i 2  ...  E p  1 X i , p  1  H i (1)

where, E 0 , E 1 ,..., E p 1 are parameters, X i1 ,..., E p 1 are known constants,

H i are independent N (0, V 2 )
i 1,..., n
In building the multiple linear regression model for bank performance, the 96 data collected were randomly separated
into 2 sub-samples – the training (86 data) and testing samples (10 data). Training data set is used for the model
building, and the testing data set is used for the model validation at the end of analysis.
Kutner, Nachtsheim & Peter (2004) has recommended 30% of sample size as adequate size for model validation. In this
study, only 10% of the sample size is used as the testing sample, due to the limited available number of samples. In
order to test the relationship between bank performance and its determinants, the following multiple regression equation
is proposed for the bank data in Equation 2.

ROAi E 0  E1 LIQi  E 2 LLOSSi  E 3 SIZEi  E 4COSTINCi  E 5CONCi

(2)
 E 6GDPi  E 7 CPI i  H i
i 1,..., n

where
ROAi = Return on average assets which serve as performance indicator
LIQi = Loan-to-assets ratio as a measure of liquidity
LLOSSi = Loan loss provision-to-loans ratio as a measure of credit risk
SIZEi = Size of a bank based on its total assets
COSTINCi = Cost income ratio which measures bank efficiency
CONCi = A concentration ratio, calculated by taking the largest 3 banks divided by total assets of the
banking sector
GDPi = Gross Domestic Product
CPI i = Consumer Price Index
Hi = error term
The underlying assumptions of linearity, normality, constant variance and independence of error terms must be satisfied
in order to get a more valid model. Diagnostics for the underlying assumptions must be done and remedial measures can
then be taken accordingly.

178
International Business Research October, 2009

3.2 Artificial Neural Network

The development and abundance of high speed computers has made artificial neural network to become an increasingly
popular research subject. The method has been applied to many areas including banking and finance. Artificial neural
network has been applied to areas such as determining bank bankruptcy, time series, loan assessment etc.
The idea of neural network originated from the most fascinating organ in the human body, the brain. The human brain
consists of billions of basic units called neurons. The basic neuron unit is illustrated in Figure 1. The neuron consists of
dendrites, a cell body and an axon connecting to axon terminals.
Information or inputs received by the brain are transferred into the cell body through dendrites. The cell body acts as the
processing unit, where all the learned information is then transferred into outputs and passed down by the axon. The
muscles or other parts of the body receive the outputs via the axon terminals for actions. This concept was first studied
in 1943 by McCulloch and Pitts to form a mathematical model.
Figure 2 illustrates a one hidden layer feed forward network with inputs x1 ,..., xi and output y k . Each input is
given its own synaptic weight. The weights are then transferred into the hidden layer, which consists of a number of
hidden neurons. Each neuron performs a weighted summation of the inputs and then passes a nonlinear activation
function. The output of the network is given by Equation 3.
yk M (¦ wki vk ) M (v) (3)
yk = network’s output
wki = synaptic weight between output of neuron k and input of neuron i
vk ¦w v
ki k
= activation potential of neuron i (net input)
M (v) = activation function
The nonlinear activation function in the neuron is usually chosen to be a smooth step function. In this study, the
1
sigmoid function M (v ) is used.
1  e v
Researchers in the field of robust statistics indicated that real data are never freed from outliers. About 10% of the real
data set is expected to contain outliers. Preliminary checking was done to identify any gross outliers in the bank data. A
simple method, the boxplot was chosen to identify outliers and get a rough idea of the symmetry of the data.
4. Results
4.1 Results of Multiple Linear Regression
The first order regression model was considered using all the seven predictor variables. Stepwise regression was
performed on the modelling dataset and the obtained results are shown in Table 2.
From the regression output, it was found that only two predictor variables are significant in affecting the bank
performance, LLOSS and COSTINC. The significant estimated parameters were found to be E 0 =3.881, E 2 = -0.199
and E 4 = -0.061. The mean square error for the residuals was found to be 0.585. The total variation explained by
the two significant variables, LLOSS and COSTINC on the bank performance ROA is about 57.2%, as shown by the R2
value.
Table 3 shows the residual statistics obtained from the bank dataset. The Mahalanobis distance shows a very large
maximum value of 24.662. The maximum studentized residual value is also much larger than the cut-off value 3.
This indicates the existence of at least one outlying value in the regression model. Further investigation was made to
identify the outlying value(s).
Remedial measures must be taken to solve the matter concerning influential outliers. Robust regression approaches such
as Least Absolute Residuals, Reweighted Least Square and Least Median of Squares (LMS) regression can be
employed in the presence of outliers. The robust method gives a superior result than the ordinary least square. Mean
Square Error (MSE) from the ordinary least square may be inflated when influential outlier exists in the dataset.
In this study, the Least Median of Squares Regression is applied to the data set to compare with the results obtained by
eliminating the outlier. Results of LMS regression is presented in Table 4.
š
The fitted robust regression function is Y 3.4234 - 0.4197LLOSS - 0.0288COSTINC
with a low proportion of variation in response explained by the model (28.73%). The residual scale estimate is
calculated as 0.4295 with degree of freedom 78. In the presence of influential outlier(s), the robust regression method
always outperformed the traditional multiple linear regression. In the absence of outlier, the two performed almost
equally well, but the ordinary least square method is much preferred due to extensive calculations involved in the robust
method.

179
Vol. 2, No. 4 International Business Research

4.2 Results of Artificial Neural Network

The 96 data bank data collected in the study were randomly assigned into three different sub-samples as given in Table
5. An ample number of data is needed for the training data set. Only 10% of the data are used for testing and
validation purposes, due to the limited number of available sample.
Feedforward neural network or multilayer perceptron with one hidden layer and seven inputs, corresponding to the
seven variables are suggested to be used in the study. Experiments are done to determine the best number of neurons in
the hidden layer and to evaluate the performance of the neural network in predicting bank performance. Under
supervised learning, the desired output (ROA) for each input is given to the network. The network will then adjust
weights in the hidden neuron so as to minimize the error obtained between the network’s output and the desired output.
Results for different numbers of neurons are presented in Table 6. The number of neurons with the lowest mean square
error (MSE) for the testing data is chosen to be the best number of hidden nodes for the seven inputs. Neural network
with 13 hidden nodes are identified to perform at its best during the training and testing. The lowest mean square error
(MSE) of 0.00687 is obtained. R2 value shows a satisfactory value at 0.66868.
The performance of the network during the training phase is very high for different numbers of neurons. The testing
data set gives the lowest mean square error (MSE) value when the network contains 13 hidden neurons. The testing data
gives a low R2 value of about 0.669. The value indicates the proportion of total variation explained by the results is
about 66.9%. Results are said to be satisfactory if the R2 value is more than 0.80. Nevertheless, results obtained from the
network has a higher R2 value than the multiple linear regression model
4.3 Comparisons of Performance
Performance of the two methods under study, namely multiple linear regression and artificial neural network, in
predicting bank performance is measured by using the mean square prediction error and the R2 value which indicates
the proportion of variation explained by the validation model. Model validation is done by using the 10 hold-out
sample.
During the validation stage, the linear relationship gives mean predicted error (MSPR) of 0.6199. The network shows a
very good performance with R2 value of 0.99616 with very low means square predicted error (MSPR) of 0.0061. This
indicates a very high predictive performance of the neural network with total variation explained by the factors by
99.616%. Performance of the two statistical methods can be summarized in Table 7.
From Table 7, the results indicate that the artificial neural network outperformed the multiple linear regression model.
This finding is similar to Nguyen & Cripps (2001) with different type of data. The predictive ability of the artificial
neural network is very high and gives a highly accurate prediction as a result of pattern recognition or generalization
made by the network. Although the predictive ability of the artificial neural network is very accurate, it somehow lacks
explanation on the parameters used. Some scholars describe artificial neural network as a ‘black box’. Multiple linear
regression gives an easy and simple explanation on the estimated parameters. This makes the method still very useful.
The multiple linear regression requires underlying assumptions of linearity, normality, etc. that may be violated when
using real data. Remedial measures are then needed to be taken on the violation of these assumptions. Artificial neural
network does not require these assumptions. It only requires a good number of data for the network to be able to
recognize the pattern formed by the data. A single influential outlier can affect the estimated regression function but
artificial neural network is very robust with noisy or unexpected data.
The artificial neural network has another disadvantage in which training time and determination of the optimal number
of neurons can take quite some time and can be very complicated and exhaustive. The multiple linear regression method
is very simple to apply by using available statistical computer software. The future of artificial neural network is
promising but further research is needed on the development of computer software that can help reduce the long
training time.
5. Conclusion
From the study, we may conclude that multiple linear regression can be used as a simple tool to study the linear
relationship between the dependent variable and independent variables. The method provides two significant
explanatory variables to bank performance and explains the effect of the contributing factors in a simple, understood
manner. The method somehow has its limitations for its underlying assumptions are always violated when using real
data. The presence of outliers also produces biased estimators of the parameters.
Violations of the underlying assumptions are often accompanied by remedial measures. Data transformation, robust
regression and ridge regression are among the remedial measures to be taken. Thus, this requires the needs to
understand further statistical techniques, which is out of the scope of this study.

180
International Business Research October, 2009

The artificial neural network gives highly accurate results from the inputs. The method increases its performance with a
large number of examples. An optimal number of neurons also need to be determined because the network tends to
memorize with too many neurons but it can hardly make any generalization if too few are used. The method does not
require any distributional assumptions and it is robust to outliers and unexpected data in the inputs. The artificial neural
network outperformed the multiple regression in predicting bank performance but somehow, the method gives no
explanation on the estimation of the parameters. Decision makers are provided with the information on the estimated
parameters from the results of multiple linear regression. The prediction of the method is only made on the mean
performance and thus gives a higher MSPR value.
A similar study can be performed using a larger dataset. As suggested by Kutner, Nachtsheim & Peter (2004), the
validation model should consist about 30% of the dataset. Furthermore, three different sub-samples are required for the
training, testing and validation in artificial neural network. The effect of different years and different banks should
also be taken into considerations. Other predictor variables such as bank ownership, bank labour growth, macro or
microeconomic factors are to be included which may explain the total variation in predicting bank performance.
References
Aiken, M. (1999). Using a Neural Network to Forecast Inflation, Industrial Management & Data Systems, Vol.
99/7:.296-301.
Arulsudar, N., Subramaniam, N. & Murthy, R.S.R (2005). Comparison of Artificial Neural Network and Multiple
Linear Regression in the Optimization of Formulation Parameters of Leuprolide Acetate Loaded Liposomes, Journal of
Pharmacy and Pharmaceutical Sciences, 8(2):.243-258.
Athanasoglou P. P., Brissimis, S. N. & Delis M.D. (2008). Bank-specific, Industry-specific and Macroeconomic
Determinants of Bank Profitability, International Financial Markets, Institutions & Money, Vol. 18:.121-136.
Bank Negara Malaysia at www.bnm.gov.my.
Boritz, J. E., & Kennedy, D.B. (1995). Effectiveness of Neural Network Types for Prediction of Business Failure,
Expert Systems with Applications, Vol. 9, No. 4, p.503-512.
Brunell, P.R. & Folarin, B.O. (1997). Impact of Neural Networks in Finance, Neural Computation & Application, Vol.
6:.193-200.
Chokmani, K. T. Quarda, J. V., Hamilton, S., Hosni,G. M., & Hugo, G. (2008). Comparison of Ice-Affected
Streamflow Estimates Computed Using Artificial Neural Networks and Multiple Regression Techniques, Journal of
Hydrology, Vol. 349:.383-396.
Delen, D., G. Walker, G., & Kadam, A. (2005). Predicting Breast Cancer Survivability: A Comparison of Three Data
Mining Methods, Artificial Intelligence in Medicine, Vol. 34:.113-117.
Haron, S. (2004). Determinants of Islamic Bank Profitability, Global Journal of Finance & Economics, USA, 1 (1):
11-33.
Kutner, M., Nachtsheim C. J., & Peter, J. (2004). Applied Linear Regression Models, McGraw Hill/Irwin Series, 4th
Edition.
Leshno, M., & Spector, Y. (1996). Neural Network Prediction Analysis: The Bankruptcy Case, Neurocomputing, Vol.
10:.125-147.
Nguyen, N., & Cripps, A. (2001). Predicting Housing Value: A Comparison of Multiple Linear Regression Analysis
and Artificial Neural Networks, Journal of Real Estate Research, 22 (3): 313-336.
Midi, H., & Imon, A. H. M. R. (2006). The Use and Abuse of Statistics, Paper presented at the National Statistics
Conference, Putrajaya International Convention Centre, Putrajaya, Malaysia, 4th-5th September 2006.
Sanusi, N.A., & Mohammed, N. (2007). Profitability of an Islamic Bank: Panel Evidence from Malaysia, Readings in
Islamic Economics & Finance, Chapter 6:.97-116.
Vellido, A. (1999). Neural Networks in Business: A Survey of Applications (1992-1998), Expert Systems with
Applications, Vol. 17: 51 – 70.
Zhang, G., Hu, M. Y., Patuwo B. E. & Indro, D. C. (1999). Artificial Neural Networks in Bankruptcy Prediction:
General Framework and Cross-Validation Analysis, European Journal of Operational Research, 116:.16-32.

181
Vol. 2, No. 4 International Business Research

Table 1. Dependent & Independent Variables to Predict Bank Performance

Variable Measure Notation
Dependent Variable
Profitability/ Performance Net profits/Assets ROA
Independent Variables
1. Liquidity Loans/Assets LIQ
2. Credit Risk Loan Loss Provisions/Loans LLOSS
3. Cost Income Ratio Management Cost/Assets COSTINC
4. Size ln (Real Assets) SIZE
5. Concentration Ratio 3-Bank Concentration Ratio CONC
6. Inflation Current Period Inflation Rate (Consumer Price Index) CPI
7. Economic Activity Gross Domestic Product GDP

Table 2. Stepwise Regression Results

Model Summary
Adjusted R Std. Error of the
Model R R Square Durbin-Watson
Square Estimate
1 0.670 0.449 0.442 0.86267
2 0.756 0.572 0.561 0.76496 0.991
ANOVA Results
Model Sum of Squares df Mean Square F Sig.
1 Regression 50.891 1 50.891 68.383 .000
Residual 62.513 84 0.744
Total 113.403 85
2 Regression 64.835 2 32.417 55.399 .000
Residual 48.569 83 0.585
Total 113.403 85
Coefficients
Unstandardized Standardized
Model Coefficients Coefficients T Sig.
B Std. Error Beta
(Constant) 3.873 0.326 11.867 0.000
1
COSTINC -0.064 0.008 -0.670 -8.269 0.000
(Constant) 3.881 0.289 13.410 0.000
2 COSTINC -0.061 0.007 -0.637 -8.834 0.000
LLOSS -0.199 0.041 -0.352 -4.881 0.000

Table 3. Residuals Statistics

Minimum Maximum Mean Standard Deviation
Residual -1.531 4.416 0.000 0.756
Standardized Residual -2.001 5.773 0.000 0.988
Studentized Residual -2.319 6.068 0.004 1.041
Deleted Residual -2.056 4.879 0.006 0.843
Stud. Deleted Residual -2.384 8.085 0.028 1.198
Mahalanobis Distance 0.010 24.662 1.977 4.046
Cook's Distance 0.000 1.298 0.043 0.205

Table 4. Results of LMS Regression

Coefficients: Value Std. Error t-value Pr(>|t|)
(Intercept) 3.4234 9.1990 0.6992 0.4865
LIQ -0.3136 0.4006 -0.7829 0.4361
LLOSS -0.4197 0.0606 -6.9222 0.0000
SIZE 0.0773 0.0363 2.1272 0.0366
COSTINC -0.0288 0.0048 -6.0058 0.0000
CONC -2.8235 5.1090 -0.5526 0.5821
CPI 0.0799 0.1574 0.5078 0.6130
GDP -1.4113 2.5623 -0.5508 0.5833

182
International Business Research October, 2009

Table 5. Sub-Samples in Artificial Neural Network

Type of Data Percentage Frequency
Training Data 80% 80
Testing Data 10% 6
Validation Data 10% 6

Table 6.Mean Square Error and R2 value at Selected Number of Neurons

Training Data Test data
Neurons
MSE R2 MSE R2
5 0.02040 0.81364 0.17329 0.85239
10 0.00799 0.94691 0.01500 0.83672
11 0.00505 0.96707 0.02444 0.65187
12 0.00515 0.96438 0.20735 0.59641
13 0.00358 0.97767 0.00687 0.66868
14 0.00529 0.96644 0.00964 0.79567
15 0.00297 0.96683 0.04524 0.60258
20 0.00428 0.97182 0.00738 0.87044
25 0.00672 0.96680 0.03358 0.64716

Table 7. Comparison of Performance

Method MSPR
Multiple Linear Regression 0.6190
Artificial Neural Network 0.0061

Figure 1: The Structure of the Neuron

Figure 1. The Structure of the Neuron

Figure 2. The Mathematical Model of the Neural Network

183