Determinants of Sovereign Ratings: A Comparison of Case-Based Reasoning and Ordered Probit Approaches

Abstract

The paper compares two alternative techniques for the modelling of the determinants of sovereign ratings, specifically, ordered probit and case-based reasoning. Despite the differences in approach the two alternative modelling approaches produce similar results in terms of which variables are significant and forecast accuracy. This suggests that either approach can be used, and that there is some robustness in the results. As regards significant variables, both models find that a proxy for technological development, specifically, mobile phone use, is the most important variable. Apart from the technology proxy, a range of conventional macroeconomic variables are found to be significant, in particular GDP and inflation. The models are then used to produce forecasts for 2002 and for a set of unrated countries. The forecast comparison indicates the critical role played by the technology proxy variable in the modelling.Sovereign Ratings, Ordered Response Models, Case-Based Reasoning