Optimal prediction rule: an application to debt reschedulings
This paper develops and tests a new model for assessing country credit risk and is called Multivariate Cumulative Sum. This model is dynamic in nature and allows the user to predict early enough a financial distress that could lead to debt rescheduling. The findings suggest that the model is capable of detecting potential debt - repayment difficulties as early as three years in advance. This has serious financing implications, since the lender can have ample time to re-evaluate his investment opportunities towards that country and thus avoid or limit a disastrous financial exposure.
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