DMCDM: A dynamic multi criteria decision making model for sovereign credit default risk evaluation

The losses on sovereign debt of Iceland and Greece led to concern about current sovereign credit rating systems by Moody´s and Standard and Poor´s, which can only afterwards adjust the credit score of the corresponding country. In this research, we proposed a Dynamic Multiple Criteria Decision Making Model, which evaluates and ranks the country risk based on historical data and predicts the credit crisis in advance. In proposed model, the entropy theory was introduced to assess the weight of the data of different years in the time series data. The weight of different factors was determined by AHP. Then, the country risk scores are computed and ranked by UTADIS (ÜTilités Additives Discriminantes) method. The proposed model was applied to the 1990-2006 world economy development indicator data of 32 countries extracted from World Bank database. 5 high risk countries (New Zealand, Spain, Iceland, USA and Greece) were identified by the DMCDM model and the proposed model successfully predicted the credit risk associated with 2007 subprime mortgage financial crisis in USA, 2009 Iceland Bankrupt and 2010 Greece´s economic crisis based on the data between 1990 and 2006.