Unobservable Systematic Risk Factor and Default Prediction

Posted: 26 Mar 2010

See all articles by Min Qi

Min Qi

Office of the Comptroller of the Currency - Credit Risk Analysis Division

Zhang Xiaofei

affiliation not provided to SSRN

Xinlei Shelly Zhao

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division

Date Written: November 10, 2009

Abstract

We examine the impact of the unobservable systematic risk factor on default prediction model performance. We find that including the unobservable systematic risk factor might help improve predictive accuracy, but it might not help improve rank ordering of firms by default risk. Rank ordering is mainly driven by firm-level variables, while predictive accuracy is affected by firm-level characteristics, the unobservable systematic risk factor, and to a lesser extent, observable systematic risk factors. Therefore, after controlling for firm-level characteristics, it seems more important to incorporate the unobservable systematic risk factor than the observable systematic risk factors in credit risk modeling.

Keywords: Observable systematic risk factors, unobservable systematic risk factor, default prediction, rank order, predictive accuracy

JEL Classification: G28, G33

Suggested Citation

Qi, Min and Xiaofei, Zhang and Zhao, Xinlei, Unobservable Systematic Risk Factor and Default Prediction (November 10, 2009). Available at SSRN: https://ssrn.com/abstract=1566536 or http://dx.doi.org/10.2139/ssrn.1566536

Min Qi

Office of the Comptroller of the Currency - Credit Risk Analysis Division ( email )

250 E Street, SW
Washington, DC 20219
United States

Zhang Xiaofei

affiliation not provided to SSRN ( email )

Xinlei Zhao (Contact Author)

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division ( email )

250 E Street, SW
Washington, DC 20219
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
140
Abstract Views
595
rank
113,744
PlumX Metrics