Financial Ratio Selection for Default-Rating Modeling: A Model-Free Approach and Its Empirical Performance

Journal of Applied Finance | April 1, 2004| | Copyright

Financial ratios are important factors in predicting corporate failure. In this article, I propose to use an innovative statistics procedure to identify informative financial ratios and use those ratios to predict default rating. I use three types of different default-rating model to predict default rating. I compare the predictability of the financial ratios selected from my procedure to those selected from traditional principal component analysis. I find that financial ratios identified from my procedure are superior to those from the principal component method in predicting default-rated ...

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