Credit Risk Rating Model of Developing Countries by Independent Component Analysis

Gilak Hakimabadi, Mohammad Taghi; Jafari Samimi, Ahmad; Molana, Masih

Credit Risk Rating Model of Developing Countries by Independent Component Analysis

Authors

¹ Assistant Professor of Economics, University of Mazandaran, Babolsar, Iran, Department of Economics

² Professors of Economics, University of Mazandaran, Babolsar, Iran, Department of Economics

³ M. A. Student in Economics, University of Mazandaran, Baoblsar, Iran

Abstract

The main purpose of the current paper is to introduce a model to rate credit risk in
developing countries. Since there is no comprehensive theory for evaluation of
country credit risk and no complete transparency on the process of rating credit risk
by involved institutions then the first aim of the research is to find variables which
have most impact on country risk. To gain this purpose, twenty eight financial and
economical variables having most impact on rating country risk, based on relevant
theories and previous researches, will be selected. Then by applying "Independent
Component Analysis (ICA)" we could find nine variables out of twenty eight ones
that have most influence on rating country risk between 2002-2006. Results shows
that ratio of gross fixed investment to the GDP and percentage of total external debt
to the export have positive and negative effect on countries rating. Finally estimation
of the model shows this model has the ability to justify 96% of the variance in
country credit rating (based on the results provided by Fitch and S&P institutes).

Keywords