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CART analysis of qualitative variables to improve credit rating processes

Author

Listed:
  • Giampaolo Gabbi

    (Banking and Finance Dpt Sda Bocconi Milan - Siena University)

  • Massimo Matthias

    (University of Siena, Italy)

  • Marco De Lerma

    (University of Siena, Italy)

Abstract

Qualitative behaviours of small firms are explored to forecast criticalities in the Italian credit market. We build up an evaluation process to integrate quantitative rating practices. Research method: Relevant qualitative factors to estimate the credit risk are empirically investigated by choosing variables related to seven perspectives of analysis (sector, governance, internal processes, learning and growth, customers, economic-financial analysis, quality of balance sheet). Outcomes have been elaborated through the Classification And Regression Tree. Rating evaluation is based upon qualitative factors. Findings: The capability to forecast bad firms is 92.4\%, while 84.5\% is the percentage to forecast good firms. The Cumulative Accuracy Curve shows the 84\% ability to explain the variance of phenomenon. Main results: ratings of firms are primary explained by aptitude to reach short and long term purposes; banks’ analysts should integrate their quantitative models with qualitative data; methodologies employed offer a quantitative solution to estimate the weight of each variable. Conclusions: When balance sheets are characterized by small consistency, qualitative variables should be taken into consideration to elaborate or integrate rating procedures.

Suggested Citation

  • Giampaolo Gabbi & Massimo Matthias & Marco De Lerma, 2006. "CART analysis of qualitative variables to improve credit rating processes," Computing in Economics and Finance 2006 179, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:179
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    Citations

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    Cited by:

    1. Ben Hassine, Hela, 2015. "Financial Crises Management By The IMF : Was External And Public Debt Sustainable ?," MPRA Paper 75466, University Library of Munich, Germany.
    2. Ben Hassine Khalladi, hela, 2015. "Financial Crisis Management in Emerging Countries: Optimal Level of International Reserves and Ex Ante Conditions for an International Lender of Last Resort Intervention," MPRA Paper 96151, University Library of Munich, Germany.
    3. Hela Ben hassine khalladi, 2017. "Financial crises management by the International Monetary Fund: Was external and public debt sustainable ?," Economics Bulletin, AccessEcon, vol. 37(1), pages 118-136.
    4. Francesco Campanella, 2014. "Assess the Rating of SMEs by using Classification And Regression Trees (CART) with Qualitative Variables," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 16-32, August.

    More about this item

    Keywords

    credit risk; qualitative models; rating; regression tree;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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