Corporate risk stratification through an interpretable autoencoder-based model

In this manuscript, we propose an innovative early warning Machine Learning-based model to identify potential threats to financial sustainability for non-financial companies. Unlike most state-of-the-art tools, whose outcomes are often difficult to understand even for experts, our model provides an easily interpretable visualization of balance sheets, projecting each company in a bi-dimensional space according to an autoencoder-based dimensionality reduction matched with a Nearest-Neighbor-based default density estimation. In the resulting space, the distress zones, where the default intensity is high, appear as homogeneous clusters directly identified. Our empirical experiments provide evidence of the interpretability, forecasting ability, and robustness of the bi-dimensional space.