Comparing Australian and US Corporate Default Risk Using Quantile Regression

12 Pages Posted: 28 Nov 2011

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Akhmad Kramadibrata

Edith Cowan University - School of Accounting, Finance and Economics

Robert J. Powell

Edith Cowan University - School of Accounting, Finance and Economics; Financial Research Network (FIRN)

Abhay Kumar Singh

Edith Cowan University

Date Written: November, 27 2011

Abstract

The severe bank stresses of the Global Financial Crisis (GFC) have underlined the importance of understanding and measuring extreme credit risk. The Australian economy is widely considered to have fared much better than the US and most other major world economies. This paper applies quantile regression and Monte Carlo simulation to the Merton structural credit model to investigate the impact of extreme asset value fluctuations on default probabilities of Australian companies in comparison to the USA. Quantile regression allows modelling of the extreme quantiles of a distribution which allows measurement of capital and PDs at the most extreme points of an economic downturn, when companies are most likely to fail. Daily asset value fluctuations of over 600 Australian and US investment and speculative entities are examined over a ten year period spanning pre-GFC and GFC. The events of the GFC also showed how the capital of global banks was eroded as defaults increased. This paper therefore also examines the impact of these fluctuating default probabilities on the capital adequacy of Australian and US banks. The paper finds highly significant variances in default probabilities and capital between quantiles in both Australia and the US, and shows how these variances can assist banks and regulators in calculating capital buffers to sustain banks through volatile times.

Keywords: Probability of Default, Quantile Regression, Australian Banks, United States Banks

JEL Classification: G01, G21, G28

Suggested Citation

Allen, David Edmund and Kramadibrata, Akhmad and Powell, Robert J. and Singh, Abhay Kumar, Comparing Australian and US Corporate Default Risk Using Quantile Regression (November, 27 2011). Available at SSRN: https://ssrn.com/abstract=1965284 or http://dx.doi.org/10.2139/ssrn.1965284

David Edmund Allen

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Akhmad Kramadibrata

Edith Cowan University - School of Accounting, Finance and Economics ( email )

270 Joondalup Drive
Joondalup, WA g027
Australia
+61 8 6304 5265 (Phone)

Robert J. Powell (Contact Author)

Edith Cowan University - School of Accounting, Finance and Economics ( email )

Joondalup Campus
Perth
Joondalup 6027, WA
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Abhay Kumar Singh

Edith Cowan University ( email )

Joondalup Drive
Perth
Joondalup, WA 6027
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
92
Abstract Views
605
rank
278,198
PlumX Metrics