Is the Hawkes Graph Approach Applicable for Examining the Bankruptcy Risk Dependence Structure? An Empirical Analysis of Firms' Bankruptcies in Japan

28 Pages Posted: 16 Jan 2018 Last revised: 22 Jul 2018

See all articles by Teruo Kemmotsu

Teruo Kemmotsu

Independent

Hidetoshi Nakagawa

Hitotsubashi University Business School

Date Written: July 13, 2018

Abstract

In this research, we examine the types of bankruptcy risk dependence structures of Japanese firms.

For this purpose, we classify bankruptcy events observed in Japan into multiple event types based on industry type and firm size and then use a multidimensional Hawkes process that has been drawing attention recently in the field of finance research so as to model the self-exciting and/or mutually exciting properties of bankruptcy among the event types.

As for estimation of the intensity processes associated with the multidimensional Hawkes process, we attempt a new approach using a nonparametric estimation for piece-wise constant kernel functions, introduced by Embrechts and Kirchner (2) to effectively obtain a weighted directed graph representing the estimation result called the Hawkes graph, as well as a conventional maximum likelihood estimation for an exponentially decaying kernel function.

We compare and consider the estimation results of the two specifications via visualization with Hawkes graph representations to find that the Embrechts and Kirchner's estimation is applicable for examination of bankruptcy risk contagion.

Keywords: Hawkes process, Hawkes graph, bankruptcy risk dependence, bankruptcies in Japan

JEL Classification: C32, C35, G33

Suggested Citation

Kemmotsu, Teruo and Nakagawa, Hidetoshi, Is the Hawkes Graph Approach Applicable for Examining the Bankruptcy Risk Dependence Structure? An Empirical Analysis of Firms' Bankruptcies in Japan (July 13, 2018). Available at SSRN: https://ssrn.com/abstract=3099934 or http://dx.doi.org/10.2139/ssrn.3099934

Teruo Kemmotsu

Independent ( email )

Hidetoshi Nakagawa (Contact Author)

Hitotsubashi University Business School ( email )

National Center for Sciences
2-1-2 Hitotsubashi,
Chiyoda-ku,, 1018439
Japan
342123104 (Phone)

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