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Assessing financial risks using a multicriteria sorting procedure: the case of country risk assessment

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  • Doumpos, Michael
  • Zopounidis, Constantin

Abstract

The assessment of financial risks is a problem of major interest for corporate entities (organizations, financial institutions, firms, etc.). The vulnerable economic and financial environments necessitate the development of operational approaches to measure and control financial risks. Most of the methodologies that have been proposed in the past employ a probabilistic notion of risk. This paper proposes an alternative approach to measure financial risks, considering their multidimensional nature. The proposed approach is based on the multicriteria decision aid (MCDA) method Multi-Group Hierarchical DIScrimination (M.H.DIS). The aim of the M.H.DIS method within the financial risk assessment context is to develop a set of additive utility functions that classify the considered alternatives (firms, investment projects, portfolios, countries, etc.) into predefined risk classes. The efficiency of the method is illustrated through a case study regarding the country risk assessment problem. Using the M.H.DIS method a discrimination model is developed that classifies the countries into four groups, and measures the corresponding creditworthiness and risk of the countries. Several validation tests are performed in order to compare the classification results obtained through M.H.DIS to the results obtained through multiple discriminant analysis.

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  • Doumpos, Michael & Zopounidis, Constantin, 2001. "Assessing financial risks using a multicriteria sorting procedure: the case of country risk assessment," Omega, Elsevier, vol. 29(1), pages 97-109, February.
    • Handle: RePEc:eee:jomega:v:29:y:2001:i:1:p:97-109
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    13. Qazi, Abroon, 2023. "Exploring Global Competitiveness Index 4.0 through the lens of country risk," Technological Forecasting and Social Change, Elsevier, vol. 196(C).
    14. 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.
    15. Mehmet Karan & Aydın Ulucan & Mustafa Kaya, 2013. "Credit risk estimation using payment history data: a comparative study of Turkish retail stores," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 21(2), pages 479-494, March.
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