[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/gam/jmathe/v10y2022i15p2679-d875491.html
   My bibliography  Save this article

A Novel IBA-DE Hybrid Approach for Modeling Sovereign Credit Ratings

Author

Listed:
  • Srđan Jelinek

    (FIS, Bulevar Milutina Milankovića 136b, 11000 Belgrade, Serbia)

  • Pavle Milošević

    (Faculty of Organizational Sciences, University of Belgrade, Jove Ilića 154, 11000 Belgrade, Serbia)

  • Aleksandar Rakićević

    (Faculty of Organizational Sciences, University of Belgrade, Jove Ilića 154, 11000 Belgrade, Serbia)

  • Ana Poledica

    (Faculty of Organizational Sciences, University of Belgrade, Jove Ilića 154, 11000 Belgrade, Serbia)

  • Bratislav Petrović

    (Faculty of Organizational Sciences, University of Belgrade, Jove Ilića 154, 11000 Belgrade, Serbia)

Abstract
Nowadays, the sovereign credit rating is not only an index of a country’s economic performance and political stability but also an overall indicator of development and growth, as well as the trust factor that is associated with the country. Due to its importance, the vast amount of available information, and the lack of a closed-form solution, prediction models based on machine learning (ML) and computation intelligence (CI) techniques are being increasingly used to complement traditional financial approaches. In this paper, we aim to introduce a novel ML-CI approach for sovereign credit rating prediction based on a differential evolution (DE) algorithm and interpolative Boolean algebra (IBA). In fact, the proposed approach is based on a pseudo-logical function in the IBA framework derived from the historical data of publicly available indicators using the DE algorithm. Such functions are easily interpreted and enable a subtle gradation among countries. It is shown that the IBA-DE approach outperforms back-propagation neural networks on the observed problem while also providing a deeper insight into each of the indicators used for prediction and its respective influence on the prediction rating on the other.

Suggested Citation

  • Srđan Jelinek & Pavle Milošević & Aleksandar Rakićević & Ana Poledica & Bratislav Petrović, 2022. "A Novel IBA-DE Hybrid Approach for Modeling Sovereign Credit Ratings," Mathematics, MDPI, vol. 10(15), pages 1-21, July.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:15:p:2679-:d:875491
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7390/10/15/2679/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7390/10/15/2679/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rui Xie & Rui Liu & Xian-Bei Liu & Jia-Ming Zhu & Ghulam Mustafa, 2021. "Evaluation of SMEs’ Credit Decision Based on Support Vector Machine-Logistics Regression," Journal of Mathematics, Hindawi, vol. 2021, pages 1-10, March.
    2. Oral, Muhittin & Kettani, Ossama & Cosset, Jean-Claude & Daouas, Mohamed, 1992. "An estimation model for country risk rating," International Journal of Forecasting, Elsevier, vol. 8(4), pages 583-593, December.
    3. Dilek Teker & Aynur Pala & Oya Kent, 2013. "Determination of Sovereign Rating: Factor Based Ordered Probit Models for Panel Data Analysis Modelling Framework," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 122-132.
    4. Antonio Afonso & Pedro Gomes & Philipp Rother, 2009. "Ordered response models for sovereign debt ratings," Applied Economics Letters, Taylor & Francis Journals, vol. 16(8), pages 769-773.
    5. Bissoondoyal-Bheenick, Emawtee & Brooks, Robert & Yip, Angela Y.N., 2006. "Determinants of sovereign ratings: A comparison of case-based reasoning and ordered probit approaches," Global Finance Journal, Elsevier, vol. 17(1), pages 136-154, September.
    6. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
    7. Rahib H. Abiyev, 2014. "Credit Rating Using Type-2 Fuzzy Neural Networks," Mathematical Problems in Engineering, Hindawi, vol. 2014, pages 1-8, March.
    8. Constantin Mellios & Eric Paget-Blanc, 2006. "Which factors determine sovereign credit ratings?," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 361-377.
    9. Krink, Thiemo & Paterlini, Sandra & Resti, Andrea, 2007. "Using differential evolution to improve the accuracy of bank rating systems," Computational Statistics & Data Analysis, Elsevier, vol. 52(1), pages 68-87, September.
    10. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    11. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    12. Piramuthu, Selwyn, 1999. "Financial credit-risk evaluation with neural and neurofuzzy systems," European Journal of Operational Research, Elsevier, vol. 112(2), pages 310-321, January.
    13. Pavle Milošević & Bratislav Petrović & Ivana Dragović, 2021. "A Novel Approach to Generalized Intuitionistic Fuzzy Sets Based on Interpolative Boolean Algebra," Mathematics, MDPI, vol. 9(17), pages 1-21, September.
    14. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1327-1343, June.
    15. Grunert, Jens & Norden, Lars & Weber, Martin, 2005. "The role of non-financial factors in internal credit ratings," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 509-531, February.
    16. Hammer, P.L. & Kogan, A. & Lejeune, M.A., 2006. "Modeling country risk ratings using partial orders," European Journal of Operational Research, Elsevier, vol. 175(2), pages 836-859, December.
    17. Vanja Bozic & Cosimo Magazzino, 2013. "Credit Rating Agencies: The Importance of Fundamentals in the Assessment of Sovereign Ratings," Economic Analysis and Policy, Elsevier, vol. 43(2), pages 157-176, September.
    18. Alsakka, Rasha & ap Gwilym, Owain, 2010. "Leads and lags in sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2614-2626, November.
    19. Antonio Afonso, 2003. "Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(1), pages 56-74, March.
    20. Syau, Yu-Ru & Hsieh, Hai-Teh & Lee, E Stanley, 2001. "Fuzzy Numbers in the Credit Rating of Enterprise Financial Condition," Review of Quantitative Finance and Accounting, Springer, vol. 17(4), pages 351-360, December.
    21. Erdem, Orhan & Varli, Yusuf, 2014. "Understanding the sovereign credit ratings of emerging markets," Emerging Markets Review, Elsevier, vol. 20(C), pages 42-57.
    22. Choy, Swee Yew & Chit, Myint Moe & Teo, Wing Leong, 2021. "Sovereign credit ratings: Discovering unorthodox factors and variables," Global Finance Journal, Elsevier, vol. 48(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zoran Ivanovic & Sinisa Bogdan & Suzana Baresa, 2015. "Modeling and Estimating Shadow Sovereign Ratings," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(3), September.
    2. Teixeira, João C.A. & Silva, Francisco J.F. & Ferreira, Manuel B.S. & Vieira, José A.C., 2018. "Sovereign credit rating determinants under financial crises," Global Finance Journal, Elsevier, vol. 36(C), pages 1-13.
    3. Zamira Oskonbaeva, 2020. "Determinants of credit ratings: evidence from panel discrete model," Economics and Business Letters, Oviedo University Press, vol. 9(3), pages 240-247.
    4. Slapnik, Ursula & Lončarski, Igor, 2023. "Understanding sovereign credit ratings: Text-based evidence from the credit rating reports," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    5. Dilek Teker & Aynur Pala & Oya Kent, 2013. "Determination of Sovereign Rating: Factor Based Ordered Probit Models for Panel Data Analysis Modelling Framework," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 122-132.
    6. Aras, Osman Nuri & Öztürk, Mustafa, 2018. "The Effect of the Macroeconomic Determinants on Sovereign Credit Rating of Turkey," MPRA Paper 86642, University Library of Munich, Germany.
    7. Gabriel Caldas Montes & Diego Silveira Pacheco Oliveira, 2019. "Central bank transparency and sovereign risk ratings: a panel data approach," International Economics and Economic Policy, Springer, vol. 16(2), pages 417-433, April.
    8. Bernal, Oscar & Girard, Alexandre & Gnabo, Jean-Yves, 2016. "The importance of conflicts of interest in attributing sovereign credit ratings," International Review of Law and Economics, Elsevier, vol. 47(C), pages 48-66.
    9. Cuadros-Solas, Pedro Jesús & Salvador Muñoz, Carlos, 2022. "Disentangling the sources of sovereign rating adjustments: An examination of changes in rating policies following the GFC," Research in International Business and Finance, Elsevier, vol. 59(C).
    10. Unver, Mustafa & Dogru, Bulent, 2015. "The Determinants of Economic Fragility: Case of the Fragile Five Countries," MPRA Paper 68734, University Library of Munich, Germany, revised 2015.
    11. Robert V. Breunig & Tse Chern Chia, 2015. "Sovereign Ratings and Oil-Exporting Countries: The Effect of High Oil Prices on Ratings," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 113-138, March.
    12. Panos Gavras & Sofoklis D. Vogiazas & Maria Koura, 2016. "An Empirical Assessment of Sovereign Country Risk in the Black Sea Region," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(1), pages 77-93, February.
    13. Emawtee Bissoondoyal-Bheenick & Robert Brooks & Samantha Hum & Sirimon Treepongkaruna, 2011. "Sovereign rating changes and realized volatility in Asian foreign exchange markets during the Asian crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 21(13), pages 997-1003.
    14. Yalta, A. Talha & Yalta, A. Yasemin, 2018. "Are credit rating agencies regionally biased?," Economic Systems, Elsevier, vol. 42(4), pages 682-694.
    15. Šergo Zdravko & Gržinić Jasmina, 2018. "Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism," South East European Journal of Economics and Business, Sciendo, vol. 13(2), pages 100-111, December.
    16. Reusens, Peter & Croux, Christophe, 2017. "Sovereign credit rating determinants: A comparison before and after the European debt crisis," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 108-121.
    17. Abdulkerim Karaaslan & Kürşat Özgür Özden, 2017. "Forecasting Turkey’s Credit Ratings with Multivariate Grey Model and Grey Relational Analysis," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(3), pages 583-610, September.
    18. Erdem, Orhan & Varli, Yusuf, 2014. "Understanding the sovereign credit ratings of emerging markets," Emerging Markets Review, Elsevier, vol. 20(C), pages 42-57.
    19. Athari, Seyed Alireza & Kondoz, Mehmet & Kirikkaleli, Dervis, 2021. "Dependency between sovereign credit ratings and economic risk: Insight from Balkan countries," Journal of Economics and Business, Elsevier, vol. 116(C).
    20. Salvador, Carlos & Pastor, Jose Manuel & Fernández de Guevara, Juan, 2014. "Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency," Journal of Financial Stability, Elsevier, vol. 11(C), pages 13-31.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jmathe:v:10:y:2022:i:15:p:2679-:d:875491. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.