A Quantile Analysis of Default Risk for Speculative and Emerging Companies

8 Pages Posted: 3 Dec 2011

See all articles by Robert J. Powell

Robert J. Powell

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

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

Abhay Kumar Singh

Edith Cowan University

Date Written: December 1, 2011

Abstract

Using quantile regression, this article examines default risk of emerging and speculative companies in Australia and the United States as compared to established and investment entities. We use two datasets for each of the two countries, one speculative and one established. In the US we compare companies from the S&P 500 to those on the Speculative Grade Liquidity Ratings list (Moody's Investor Services, 2010). For Australia, we compare entities from the S&P/ASX 200 to those on the S&P/ASX Emerging Companies Index (EMCOX). We also divide the datasets into GFC and Pre-GFC periods to examine default risk over different economic circumstances. Quantile Regression splits the data into parts or quantiles, thus allowing default risk to be examined at different risk levels. This is especially useful in measuring extreme risk quantiles, when corporate failures are most likely. We apply Monte Carlo simulation to asset returns to calculate Distance to Default using a Merton structural credit model approach. In both countries, the analysis finds substantially higher default risk for speculative as compared to established companies. The spread between speculative company and established company default risk is found to remain constant in Australia through different economic circumstances, but to increase in the US during the GFC as compared to pre-GFC. These findings are important to lenders in understanding, and providing for, default risk for companies of different grades through varying economic cycles.

Keywords: Quantile Regression, Emerging and speculative companies, extreme risk and return

JEL Classification: G01, G21, G28

Suggested Citation

Powell, Robert J. and Allen, David Edmund and Kramadibrata, Akhmad and Singh, Abhay Kumar, A Quantile Analysis of Default Risk for Speculative and Emerging Companies (December 1, 2011). Available at SSRN: https://ssrn.com/abstract=1967310 or http://dx.doi.org/10.2139/ssrn.1967310

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

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)

Abhay Kumar Singh

Edith Cowan University ( email )

Joondalup Drive
Perth
Joondalup, WA 6027
Australia

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