Rating Firms and Sensitivity Analysis
Journal of the Operational Research Society (2019), https://doi.org/10.1080/01605682.2019.1650626
36 Pages Posted: 21 Jul 2019 Last revised: 30 Apr 2020
Date Written: July 20, 2019
This paper introduces a model for rating a firm's default risk based on fuzzy logic and expert system and an associated model of sensitivity analysis (SA) for managerial purposes. The rating model automatically replicates the evaluation process of default risk performed by human experts. It makes use of a modular approach based on rules blocks and conditional implications. The SA model investigates the change in the firm's default risk under changes in the model inputs and employs recent results in the engineering literature of Sensitivity Analysis. In particular, it (i) allows the decomposition of the historical variation of default risk, (ii) identifies the most relevant parameters for the risk variation, and (iii) suggests managerial actions to be undertaken for improving the firm's rating.
Keywords: credit rating, default risk, fuzzy logic, fuzzy expert system, sensitivity analysis
JEL Classification: G00, G30, G32, G33, C67, D81
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