Cure Events in Default Prediction

Posted: 18 Nov 2015

See all articles by Marcus Wolter

Marcus Wolter

Leibniz Universität Hannover

Daniel Roesch

University of Regensburg

Date Written: 2014

Abstract

This paper evaluates the resurrection event regarding defaulted firms and incorporates observable cure events in the default prediction of SME. Due to the additional cure-related observable data, a completely new information set is applied to predict individual default and cure events. This is a new approach in credit risk that, to our knowledge, has not been followed yet. Different firm-specific and macroeconomic default and cure-event-influencing risk drivers are identified. The significant variables allow a firm-specific default risk evaluation combined with an individual risk reducing cure probability. The identification and incorporation of cure-relevant factors in the default risk framework enable lenders to support the complete resurrection of a firm in the case of its default and hence reduce the default risk itself. The estimations are developed with a database that contains 5930 mostly small and medium-sized German firms and a total of more than 23000 financial statements over a time horizon from January 2002 to December 2007. Due to the significant influence on the default risk probability as well as the bank’s possible profit prospects concerning a cured firm, it seems essential for risk management to incorporate the additional cure information into credit risk evaluation.

Suggested Citation

Wolter, Marcus and Roesch, Daniel, Cure Events in Default Prediction (2014). European Journal of Operational Research, No. 238, 2014, p. 846-857, Available at SSRN: https://ssrn.com/abstract=2690791

Marcus Wolter

Leibniz Universität Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

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