A simple mathematical programming model for countries' credit ranking problem

• Author: Abdollah Hadi‐Vencheh,Nima Mirzaei,Sadegh Niroomand
• Date: 01 January 2019
• Published date: 01 January 2019
• DOI: http://doi.org/10.1002/ijfe.1673

RESEARCH ARTICLE

A simple mathematical programming model for countries'

credit ranking problem

Sadegh Niroomand

1

| Nima Mirzaei

2

| Abdollah Hadi‐Vencheh

3

1

Department of Industrial Engineering,

Firouzabad Institute of Higher Education,

Firouzabad, Fars, Iran

2

Department of Industrial Engineering,

Istanbul Aydin University, Istanbul,

Turkey

3

Department of Mathematics, Isfahan

(Khorasgan) Branch, Islamic Azad

University, Isfahan, Iran

Correspondence

Abdollah Hadi‐Vencheh, Department of

Mathematics, Isfahan (Khorasgan)

Branch, Islamic Azad University, Isfahan,

Iran.

Email: ahadi@khuisf.ac.ir

JEL Classification: C02; C61

Abstract

This study proposes a new mathematical model that ranks the countries

according to their investments. The proposed model compares countries based

on specified factors and gives a score for each country. To set out the factors,

after investigating on quite a lot of related studies, several macroeconomic fac-

tors are gathered, and the most important ones are selected for further investi-

gation. An important advantage of the proposed model is that it can be solved

manually by managers, investors, or researchers without a need for any profes-

sional optimization solver software. The key factor in this research is develop-

ing a mathematical model that ranks any set of countries rather than rating

them. At the end of pair comparison, countries are ranked from higher to

lower scores from the economical point of view. In addition, the accuracy of

the obtained result is validated by comparing them with Moody's rating system

(August 2016) using Jaccard similarity index. The results of the proposed are

compared with multiple criteria decision‐making techniques as well.

KEYWORDS

countries credit ranking, countries creditrating, Jaccard similarity index, non‐linear programming

1|INTRODUCTION

For many investors, it is important to compare their

choices of capital investment in different countries. To

do such comparisons, the potential countries can be rated

or ranked by considering economic and political factors.

Therefore, the investors can decide more easily where to

invest capitals. The rating and ranking of the countries

can be obtained from the economic problems such as

credit rating (ranking) problems of the countries. In brief,

the credit rating problem takes a set of countries, a set of

economic and political factors and performance of each of

the countries in terms of factors as inputs of the problem.

Then, as an output, the problem defines some rating

classes and assigns each country to one of the classes.

Because low rating scales are associated with losses for

investor, it makes it important for them to measure or

estimate country credit rating (Eichler & Hofmann,

2013). On the other hand, the credit ranking problem

takes the same inputs and then ranks the countries from

the best one to the worst. It is necessary to mention that

most of the studies focused on credit rating of the

countries instead of ranking them. Therefore, the major

part of this work deals with the studies of credit rating

of the countries.

In the past, only famous agencies such as Standard &

Poor's (S&P's), Moody's, and Fitch were publishing

reports about countries' credit assessments that affect

the future economic outlook of countries (see Busse &

Hefeker, 2007; Butler & Fauver, 2006; Essers, 2013). How-

ever, nowadays, credit rating agencies are not the only

provider for rating information. In fact, researchers in

some fields such as economics, operations researchers,

financial management, and statisticians propose valuable

Received: 12 November 2017 Revised: 9 July 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1673

Int J Fin Econ. 2019;24:449–460. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 449