Duplicating Moody's Municipal Credit Ratings

Abstract

In this article we have shown that it is possible to duplicate with fairly high accuracy the credit ratings recently published in Moody's Analytical Overview of 25 Leading U.S. Cities. Using multiple discriminant analysis and a set of nine discriminating variables, we can predict the distribution of cities among five credit rating categories with 83% accuracy and among two aggregated cate gorres with 95% accuracy. Our accuracy rate is much higher than that of pre vious studies in this field. However, we wish to offer a note of caution in re porting our results. The sample we worked with was relatively small. We used it because it seemed to us that the publication of Moody's Analytical Overview provided a unique set of comparable intercity financial data and therefore a new opportunity to attempt a duplication of their ratings. We are pleased with the predictive accuracy we achieve but feel that before we can be sure that our techniques are reliable, future research using a larger sample and perhaps a greater number of variables is needed.