A Sovereign Credit Risk Assessment Study On The Basis Of The Integrated Method Of Multi-Objective Decision Making And Data Mining

In2007, the most influential subprime mortgage crisis of this century broke out in the U.S., and quickly spread with lightning speed to countries in continental Europe. Early warning systems, credit assessment systems and credit rating agencies all fail to predict the occurrence of the crisis. Financial innovations make the globalized investors unable to overlook any financial risks, especially the risk in structured financial products. From geographical point of view, the crisis rapidly spread from the United States to Europe, Japan and other parts of the world, showing global and systemic features. The main feature of the traditional financial crisis is that it is more likely to occur in emerging-markets with inadequate regulation and obvious mismatch between financial markets and the domestic economic structure. The current financial crisis began from the United States. The complex structured financial products and innovations in financial regulation have put forward higher requirements for the early crisis warning in the modern complex financial environment. It is high time to find new ways to solve the old problems. This study attempts to introduce new interdisciplinary results which prevent innovative financial crisis brought about by the country’s sovereign credit default risk.This study attempts to introduce the latest research results in emerging cross-disciplinary research, with the background of the financial and economic globalization, in order to help prevent new financial crisis brought about by the sovereign credit default risk.Given the complexity and globalization of the subprime mortgage crisis, our research thesis of sovereign debt crisis is defined as:the quantification and sorting of sovereign credit default risk.Our research ideas are:with multi-objective decision-making methods to provide methodological support for the sorting of country sovereign risk in innovative financial crisis and with data mining techniques to quantify the classification evaluation of sovereignty risk. The objective of this study is to explore solutions to the problems of identifying and preventing the sovereign credit default risk brought about by the new globalized financial crisis, and to provide scientific methods to assess and prevent sovereign risk for trade and investment worldwide. Based upon the above considerations, this research paper will include following contents:Firstly, this paper analyzes the process how the subprime mortgage crisis developed into a financial crisis. And on the basis of the problems brought about by financial innovations and modern complex financial products and the fact that the existing researches and traditional risk prediction methods failed to effectively analyze and forecast the occurrence of the crisis of complex modern financial products, this paper proposed to introduce new interdisciplinary research methods to address the emerging issues.Secondly, the subprime mortgage crisis is considered a credit risk arising from financial crisis. The paper reviews the credit risk models, rating and other related concepts of the subprime mortgage crisis. And it also reviews the sovereign credit rating methods in terms of the development from a subprime mortgage crisis to a financial crisis and even a sovereign credit crisis. After that, this research studies the prediction of the sovereign credit default risk arising from the subprime mortgage crisis through traditional econometric study methods. But the results show that traditional econometric methods cannot predict and identify this type of sovereign credit default risk, which was caused by financial innovations.Thirdly, the development and application of data mining technology and multi-objective decision-making methods provides new approaches and quantifying methods to address the issue of sovereign credit default. The paper proposed the time-dimension-based dynamic multi-objective crisis early warning models, integrating a variety of multi-objective decision-making methods and combined with the characteristics of the subprime mortgage crisis.Fourthly, in this study finally, we quantitatively sorted the target countries’ sovereign credit default risk, and cluster analysis of the predicted results was carried out to rate the countries with different level of risk. And drawing on the idea of financial pressure tests, sensitivity analysis and further analysis of the results were performed to test the reliability of the model.After empirical test, sovereign credit default risk assessment model in this study has well predictive. Through model testing and sensitivity analysis, the model has a good robustness and stability.Sovereign credit default risk is a research subject of multi-level macroscopic and microscopic study value. Since the research domain is broad and data types are diverse and the research is a complex system, the existing researches have not yet formed a widely accepted unified paradigm. This study as one of the exploratory researches in the field, tries emerging interdisciplinary methods into the research in order to provide some new research ideas for the old sovereign credit default risk issues.