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

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  • Michael Doumpos
  • Fotios Pasiouras

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

Suggested Citation

  • Michael Doumpos & Fotios Pasiouras, 2005. "Developing and Testing Models for Replicating Credit Ratings: A Multicriteria Approach," Computational Economics, Springer;Society for Computational Economics, vol. 25(4), pages 327-341, June.
    • Handle: RePEc:kap:compec:v:25:y:2005:i:4:p:327-341
    DOI: 10.1007/s10614-005-6412-4
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    References listed on IDEAS

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    Cited by:

    1. Owusu, Andrews & Zalata, Alaa Mansour, 2023. "Credit rating agency response to appointment of female audit partners: Evidence from the UK," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    2. Chrysovalantis Gaganis & Fotios Pasiouras & Charalambos Spathis & Constantin Zopounidis, 2007. "A comparison of nearest neighbours, discriminant and logit models for auditing decisions," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 15(1‐2), pages 23-40, January.
    3. 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.
    4. Marco Corazza & Stefania Funari & Federico Siviero, 2008. "An MCDA-based Approach for Creditworthiness Assessment," Working Papers 177, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    5. Elisabeth Dedman & Asad Kausar, 2012. "The impact of voluntary audit on credit ratings: evidence from UK private firms," Accounting and Business Research, Taylor & Francis Journals, vol. 42(4), pages 397-418, September.
    6. Eleimon Gonis & Salima Paul & Jon Tucker, 2012. "Rating or no rating? That is the question: an empirical examination of UK companies," The European Journal of Finance, Taylor & Francis Journals, vol. 18(8), pages 709-735, September.
    7. Hulisi Ögüt & M. Mete Doganay & Nildag Basak Ceylan & Ramazan Aktas, 2012. "Predicting Bank Financial Strength Ratings in an Emerging Economy: The Case of Turkey," Working Papers 740, Economic Research Forum, revised 2012.
    8. Corazza, Marco & Funari, Stefania & Gusso, Riccardo, 2016. "Creditworthiness evaluation of Italian SMEs at the beginning of the 2007–2008 crisis: An MCDA approach," The North American Journal of Economics and Finance, Elsevier, vol. 38(C), pages 1-26.
    9. Abdullah Ash-shu¡¯ayree Al-khawaldeh, 2013. "Determinants and Impacts of Internal Credit Rating," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 4(1), pages 120-131, January.
    10. Vahid Baradaran & Maryam Keshavarz, 2017. "System dynamics modelling of retailers' credit risk," International Journal of Industrial and Systems Engineering, Inderscience Enterprises Ltd, vol. 26(3), pages 380-396.
    11. Marco Corazza & Giovanni Fasano & Stefania Funari & Riccardo Gusso, 2021. "MURAME parameter setting for creditworthiness evaluation: data-driven optimization," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 295-339, June.
    12. Chrysovalantis Gaganis & Panagiota Papadimitri & Menelaos Tasiou, 2021. "A multicriteria decision support tool for modelling bank credit ratings," Annals of Operations Research, Springer, vol. 306(1), pages 27-56, November.
    13. Vahid Baradaran & Maryam Keshavarz, 2015. "An integrated approach of system dynamics simulation and fuzzy inference system for retailers’ credit scoring," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 28(1), pages 959-980, January.
    14. Marco Corazza & Giovanni Fasano & Stefania Funari & Riccardo Gusso, 2017. "PSO-based tuning of MURAME parameters for creditworthiness evaluation of Italian SMEs," Working Papers 04, Venice School of Management - Department of Management, Università Ca' Foscari Venezia.
    15. Zalata, Alaa Mansour & Roberts, Clare, 2017. "Managing earnings using classification shifting: UK evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 29(C), pages 52-65.
    16. Guerrero-Baena, M. Dolores & Gómez-Limón, José A. & Fruet Cardozo, J. Vicente, 2014. "Are Multi-criteria Decision Making Techniques Useful for Solving Corporate Finance Problems? A Bibliometric Analysis || ¿Son adecuadas las técnicas de decisión multicriterio para resolver los problema," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 17(1), pages 60-79, June.
    17. Silvia Angilella & Maria Rosaria Pappalardo, 2021. "Assessment of a failure prediction model in the energy sector: a multicriteria discrimination approach with Promethee based classification," Papers 2102.07656, arXiv.org.
    18. Öğüt, Hulisi & Doğanay, M. Mete & Ceylan, Nildağ Başak & Aktaş, Ramazan, 2012. "Prediction of bank financial strength ratings: The case of Turkey," Economic Modelling, Elsevier, vol. 29(3), pages 632-640.
    19. 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.
    20. Doumpos, Michael & Niklis, Dimitrios & Zopounidis, Constantin & Andriosopoulos, Kostas, 2015. "Combining accounting data and a structural model for predicting credit ratings: Empirical evidence from European listed firms," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 599-607.
    21. Doumpos, Michalis & Figueira, José Rui, 2019. "A multicriteria outranking approach for modeling corporate credit ratings: An application of the Electre Tri-nC method," Omega, Elsevier, vol. 82(C), pages 166-180.

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