Forecasting Corporate Defaults in the German Stock Market

Abstract

We estimate and test several default risk models using new and unique data on corporate defaults in the German stock market. While defaults were extremely rare events in the 1990s, they have been a characteristic feature of the German stock market since the early 2000s. We apply the structural Merton (1974) Distance-to-Default as well as several reduced form models. A variety of performance evaluation tools, including ROC-Analysis, calibration tests and loan market simulations, suggests that the Campbell et al. (2008) failure score should be used as a benchmark default risk model in research and also in the industry. We warn of several pitfalls associated with the Altman (1968) Z-Score and the Distance-to-Default.

Keywords: Default Risk, Credit Risk

JEL Classification: G32, G33