A Space-Time Approach to Investment Rating

Abstract

We present a new rating methodology based on space-time mathematics. The rating variables are depicted in a 3-D space used to calculate an investment rating based on Minkowski distances to four points in space. The model is extended to 4-D and 5-D dimensions by adding excess returns as a proxy for time and trading volumes to account for the investors’ observation point. The model is illustrated with the Dow Jones and the S&P500 indexes. The results confirm the relevance of the model and the use of space-time mathematics in financial modelling.

Keywords: Quantitative Finance, Space-time mathematics, Ratings

JEL Classification: G00, G10, G15