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Alternative Method for Determining Industrial Bond Ratings: Theory and Empirical Evidence

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

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  • Lie-Jane Kao
  • Cheng Few Lee

Abstract

The financial ratio-based credit-scoring model for bond rating system requires the maximization of two conflicting objectives simultaneously, namely, the explanatory and discriminatory power, which had not been directly addressed in literature. The main purpose of this study is to develop a credit-scoring model that combines the principle component analysis and Fisher’s discriminant analysis using the MINIMAX goal programming technique so the maximization of the two conflicting objectives can be compromised. The performance of alternative credit-scoring models including the stepwise discriminant analysis by Pinch and Mingo, Fisher’s discriminant analysis, and the principle component analysis is analyzed and compared using dataset from previous studies. We find that the proposed hybrid credit-scoring model outperforms other alternative models in both explanatory and discriminatory powers.

Suggested Citation

  • Lie-Jane Kao & Cheng Few Lee, 2020. "Alternative Method for Determining Industrial Bond Ratings: Theory and Empirical Evidence," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 57, pages 2081-2105, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0057
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    Cited by:

    1. Cheng Few Lee, 2020. "Financial econometrics, mathematics, statistics, and financial technology: an overall view," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1529-1578, May.

    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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