Abstract

http://ssrn.com/abstract=556226
 
 

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Predicting and Pricing the Probability of Default


Alessio Saretto


University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

March 10, 2005

AFA 2006 Boston Meetings Paper

Abstract:     
In this paper we study how corporate bond defaults can be predicted using financial ratios and how the estimated default probability relates to the Fama-French factors, HML and SMB. We propose a default forecast model that outperforms existing models in correctly classifying both Default and Non-Default firms. Using the default probabilities generated by our model, we find evidences that support the interpretation of HML as a distress factor. Factor loadings are positively related to the firm default probabilities. HML is negatively correlated with changes in the level of aggregate financial distress.

Number of Pages in PDF File: 44

Keywords: Default, Hazard Rate, Distress Risk

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Date posted: November 13, 2005  

Suggested Citation

Saretto, Alessio, Predicting and Pricing the Probability of Default (March 10, 2005). AFA 2006 Boston Meetings Paper; EFA 2004 Maastricht Meetings Paper No. 4510. Available at SSRN: http://ssrn.com/abstract=556226 or http://dx.doi.org/10.2139/ssrn.556226

Contact Information

Alessio Saretto (Contact Author)
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )
800 Campbell Road
SM 31
Richardson, TX 75080
United States
972-883-5907 (Phone)
HOME PAGE: http://www.utdallas.edu/~axs125732
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