Rutgers New Brunswick/Piscataway Campus
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RUTCOR Colloquia - September 29, 2005


Speaker: Miguel A. Lejeune
Affiliation: Carnegie Mellon University, Tepper School of Business
Title: Derivation of Country Risk Rating Systems Using Logical Analysis of Data
Time: 1:30 - 2:30 PM
Location: RUTCOR Building - Room 139, Rutgers University, Busch Campus, Piscataway, NJ


Abstract: In order to evaluate the creditworthiness of countries, a learning model is induced from Standard & Poor's country risk ratings. The learning model is obtained using the combinatorial-logical technique of Logical Analysis of Data (LAD), and allows the construction of a partially ordered set describing the relative superiority of countries on the basis of their creditworthiness. It is shown that the Condorcet linear extensions of this poset match closely S&P's ratings. The rating system derived from the model is transparent, self-contained, provides stable country risk rating systems, and correlate highly with the ratings of other rating agencies. The model is shown to provide excellent ratings even when applied to the following years' data or to the ratings of previously unrated countries. Rating changes implemented by S&P in subsequent years resolved most discrepancies between the constructed poset and S&P's initial ratings.

Joint work with Peter L. Hammer and Alex Kogan.

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