Banker judgement versus formal forecasting models: The case of country risk assessment

Abstract The allocation of credit to less-developed countries depends upon lenders' judgements of country risk. Research in psychology suggests that human judgement may be prone to bias. This paper uses the Institutional Investor country credit ratings as indicators of banker judgement. In terms of their ability to predict the emergence of arrears on external debt-service, it is shown that bankers are overly pessimistic about the creditworthiness of less-developed countries. Multivariate statistical models have a higher overall predictive accuracy, although they may arguably be outperformed by banker judgement when allowance is made for the differential costs of type I and type II errors.

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