Enhanced Credit Default Models for Heterogeneous SME Segments

Journal of Financial Transformation, Forthcoming

48 Pages Posted: 24 Mar 2009

See all articles by Silvia Figini

Silvia Figini

University of Pavia

Maria Elena De Giuli

University of Pavia - Department of Political Economy and Quantitative Methods

Paolo Giudici

University of Pavia - Faculty of Economics

Dean Fantazzini

Moscow School of Economics, Moscow State University; National Research University Higher School of Economics

Date Written: March, 24 2009

Abstract

Considering the attention placed on SMEs in the new Basel Capital Accord, we propose a set of Bayesian and classical longitudinal models to predict SME default probability, taking unobservable firm and business sector heterogeneities as well as analysts recommendations into account. We compare this set of models in terms of forecasting performances, both in-sample and out-of-sample. Furthermore, we propose a novel financial loss function to measure the costs of an incorrect classification, including both the missed profits and the loss given default sustained by the bank. As for the in-sample results, we found evidence that our proposed longitudinal models outperformed a simple pooled logit model. Besides, Bayesian models performed even better than classical models. As for the out-of-sample performances, the models were much closer, instead, both in terms of key performance indicators and financial loss functions, and the pooled logit model could not be outperformed

Keywords: Longitudinal models, Bayesian panel models, Credit risk, Default probability, Loss function

JEL Classification: C11, C33, C51, G32, G33

Suggested Citation

Figini, Silvia and De Giuli, Maria Elena and Giudici, Paolo and Fantazzini, Dean, Enhanced Credit Default Models for Heterogeneous SME Segments (March, 24 2009). Journal of Financial Transformation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1367511

Silvia Figini

University of Pavia ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

Maria Elena De Giuli

University of Pavia - Department of Political Economy and Quantitative Methods ( email )

27100 Pavia
Italy

Paolo Giudici

University of Pavia - Faculty of Economics ( email )

Corso Strada Nuova, 65
27100 Pavia
Italy

Dean Fantazzini (Contact Author)

Moscow School of Economics, Moscow State University ( email )

GSP-2, Leninskie Gory
Moscow, 119992
Russia
+7 495 5105256 (Phone)
+7 495 5105267 (Fax)

HOME PAGE: https://sites.google.com/site/deanfantazzini/

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

HOME PAGE: http://www.hse.ru/org/persons/11532644

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