Multi-Period Corporate Default Prediction with Stochastic Covariates
Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)
University of Tokyo - Faculty of Economics
FDIC Center For Financial Research Working Paper No. 2006-05
We provide maximum likelihood estimators of term structures of conditional probabilities of corporate default, incorporating the dynamics of firm-specific and macroeconomic covariates. For U.S. Industrial firms, based on over 390,000 firm-months of data spanning 1980 to 2004, the level and shape of the estimated term structure of conditional future default probabilities depends on a firm's distance to default (a volatility-adjusted measure of leverage), on the firm's trailing stock return, on trailing S&P 500 returns, and on U.S. interest rates, among other covariates. Variation in a firm's distance to default has a substantially greater effect on the term structure of future default hazard rates than does a comparatively significant change in any of the other covariates. Default intensities are estimated to be lower with higher short-term interest rates. The out-of-sample predictive performance of the model is an improvement over that of other available models.
Number of Pages in PDF File: 44
Keywords: default, bankruptcy, duration analysis, doubly stochastic
JEL Classification: C41, G33, E44working papers series
Date posted: May 23, 2006
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