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

Authors:
Michael Doumpos;Fotios Pasiouras
Affiliations:
Financial Engineering Laboratory, Department of Production Engineering and Management, Technical University of Crete, Chania, Greece 73100;Aff1 Aff2
Venue:
Computational Economics
Year:
2005

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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.