Predicting Default Rates: A Forecasting Model for Moody's Issuer-Based Default Rates

20 Pages Posted: 10 Oct 2007

See all articles by Sean C Keenan

Sean C Keenan

GE Commercial Finance

Jorge R Sobehart

affiliation not provided to SSRN

David T. Hamilton

Moody's Analytics

Date Written: August 1999

Abstract

This study introduces a new model for predicting future default rates. The model leverages off of the statistical relationships underlying Moody's trailing 12-month issuer-based default rate - a widely monitored indicator of corporate credit quality - to offer a superior alternative to previous forecasting techniques. The model incorporates the effect on default rates of changes in the universe of issuers, both in terms of their credit ratings and the time since they first came to market (the "aging effect"), and of macroeconomic conditions as measured by the industrial production index and interest rate variables.

Keywords: default probability, credit risk, credit ratings

JEL Classification: C51, G20, G28

Suggested Citation

Keenan, Sean C and Sobehart, Jorge R and Hamilton, David T., Predicting Default Rates: A Forecasting Model for Moody's Issuer-Based Default Rates (August 1999). Available at SSRN: https://ssrn.com/abstract=1020303 or http://dx.doi.org/10.2139/ssrn.1020303

Sean C Keenan (Contact Author)

GE Commercial Finance ( email )

United States

Jorge R Sobehart

affiliation not provided to SSRN

No Address Available

David T. Hamilton

Moody's Analytics ( email )

7 World Trade Center
250 Greenwich Street
New York, NY 10007
United States
(212) 553-1695 (Phone)

HOME PAGE: http://web.mac.com/dthamilton

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