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An MCDA composite index of bank stability using CAMELS ratios and shannon entropy

Sabri Boubaker Orcid Logo, Thanh Ngo Orcid Logo, Aristeidis Samitas, David Tripe

Annals of Operations Research

Swansea University Author: Sabri Boubaker Orcid Logo

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DOI (Published version): 10.1007/s10479-024-06023-3

Abstract

This study uses the multi-criteria decision-analysis (MCDA) approach to construct a composite performance index (CPI) directly from the CAMELS financial ratios. The CPI has several promising characteristics, such as (i) being an absolute measure of performance that allows for adding or removing data...

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Published in: Annals of Operations Research
ISSN: 0254-5330 1572-9338
Published: Springer Science and Business Media LLC 2024
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URI: https://cronfa.swan.ac.uk/Record/cronfa67512
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Abstract: This study uses the multi-criteria decision-analysis (MCDA) approach to construct a composite performance index (CPI) directly from the CAMELS financial ratios. The CPI has several promising characteristics, such as (i) being an absolute measure of performance that allows for adding or removing data without affecting the existing scores; (ii) employing CAMELS ratios directly in its calculation without the need for normalization or imputation of positive values; (iii) employing the dynamic weighting system of data envelopment analysis (DEA); (iv) providing more robust insights on the Vietnamese banking system under the Shannon entropy approach; and (v) can be an alternative measure of bank stability, compared to the CAMELS ratings and z-scores. Based on a rich dataset of 45 Vietnamese banks spanning from 2002 to 2020, our findings suggest that the proposed CPI could offer an overall view consistent with other approaches for measuring banking sector performance and stability and identifying specific strengths and weaknesses of banks.
Keywords: Composite performance index; Multi-criteria decision-analysis (MCDA); Data envelopment analysis; CAMELS; Shannon entropy; Vietnamese banks
College: Faculty of Humanities and Social Sciences
Funders: Open Access funding enabled and organized by CAUL and its Member Institutions

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