Modelling banking sector stability with multicriteria approaches |
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Authors: | Chrysovalantis Gaganis Fotios Pasiouras Michael Doumpos Constantin Zopounidis |
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Institution: | (1) European Investment Bank, Adenauer, Luxembourg |
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Abstract: | Banking crises can be damaging for the economy, and as the recent experience has shown, nowadays they can spread rapidly across
the globe with contagious effects. Therefore, the assessment of the stability of a county’s banking sector is important for
regulators, depositors, investors and the general public. In the present study, we propose the development of classification
models that assign the banking sectors of various countries in three classes, labelled “low stability”, “medium stability”,
and “high stability”. The models are developed using three multicriteria decision aid techniques, which are well-suited to
ordinal classification problems. We use a sample of 114 banking sectors (i.e., countries), and a set of criteria that includes
indicators of the macroeconomic, institutional and regulatory environment, as well as basic characteristics of the banking
and financial sector. The models are developed and tested using a tenfold cross-validation approach and they are benchmarked
against models developed with discriminant analysis and logistic regression. |
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