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Developing and Testing Models for Replicating Credit Ratings: A Multicriteria Approach

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Author Info
Michael Doumpos ()
Fotios Pasiouras

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Abstract

Credit ratings issued by international agencies are extensively used in practice to support investment and financing decisions. Furthermore, a considerable portion of the financial research has been devoted to the analysis of credit ratings, in terms of their effectiveness, and practical implications. This paper explores the development of appropriate models to replicate the credit ratings issued by a rating agency. The analysis is based on a multicriteria classification method used in the development of the model. Special focus is laid on testing the out-of-time and out-of-sample effectiveness of the models and a comparison is performed with other parametric and non-parametric classification methods. The results indicate that using publicly available financial data, it is possible to replicate the credit ratings of the firms with a satisfactory accuracy. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s10614-005-6412-4
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Publisher Info
Article provided by Springer in its journal Computational Economics.

Volume (Year): 25 (2005)
Issue (Month): 4 (June)
Pages: 327-341
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Handle: RePEc:kap:compec:v:25:y:2005:i:4:p:327-341

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Related research
Keywords: credit rating; classification; model testing; multicriteria decision aid;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," Journal of Business, University of Chicago Press, vol. 52(2), pages 231-61, April. [Downloadable!] (restricted)
  2. Treacy, William F. & Carey, Mark, 2000. "Credit risk rating systems at large US banks," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 167-201, January. [Downloadable!] (restricted)
  3. Doumpos, M. & Kosmidou, K. & Baourakis, G. & Zopounidis, C., 2002. "Credit risk assessment using a multicriteria hierarchical discrimination approach: A comparative analysis," European Journal of Operational Research, Elsevier, vol. 138(2), pages 392-412, April. [Downloadable!] (restricted)
  4. Zopounidis, Constantin & Doumpos, Michael, 1999. "A Multicriteria Decision Aid Methodology for Sorting Decision Problems: The Case of Financial Distress," Computational Economics, Springer, vol. 14(3), pages 197-218, December. [Downloadable!]
  5. Zopounidis, Constantin & Doumpos, Michael, 2002. "Multicriteria classification and sorting methods: A literature review," European Journal of Operational Research, Elsevier, vol. 138(2), pages 229-246, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fotios Pasiouras & Chrysovalantis Gaganis & Michael Doumpos, 2007. "A multicriteria discrimination approach for the credit rating of Asian banks," Annals of Finance, Springer, vol. 3(3), pages 351-367, July. [Downloadable!] (restricted)
  2. Constantin Zopounidis, Michael Doumpos, Fotios Pasiouras, 2007. "Multicriteria Framework for the Prediction of Corporate Failure in the UK," Frontiers in Finance and Economics, Lille Graduate School of Management, vol. 4(1), pages 65-90, June. [Downloadable!]
  3. Marco Corazza & Stefania Funari & Federico Siviero, 2008. "An MCDA-based Approach for Creditworthiness Assessment," Working Papers 177, Department of Applied Mathematics, University of Venice. [Downloadable!]
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