Forecasting Corporate Defaults in the German Stock Market

25 Pages Posted: 30 Jul 2018

See all articles by Richard Mertens

Richard Mertens

University of Bremen - Department of Business Administration

Thorsten Poddig

University of Bremen

Christian Fieberg

University of Bremen - Department of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: July 18, 2018

Abstract

In this paper, 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. Here, we apply the structural Merton distance to default (DD) as well as several reduced-form models. A variety of performance evaluation tools, including receiver-operating-characteristics analysis, calibration tests and a loan market simulation, are used, which suggest that the Campbell, Hilscher and Szilagyi failure score outperforms the other models. Although the performance evaluation metrics show that the failure score performs slightly worse in our case than for US data, we recommend it as a benchmark default risk model for research as well as the industry. We show that lenders who apply this model are more profitable than those who apply others. Moreover, we warn of several pitfalls associated with the Altman z-score and the DD. The former has very weak discriminatory power and the latter is severely miscalibrated.

Keywords: default risk, credit risk, risk management, forecasting, internal models.

Suggested Citation

Mertens, Richard and Poddig, Thorsten and Fieberg, Christian, Forecasting Corporate Defaults in the German Stock Market (July 18, 2018). Journal of Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3215995

Richard Mertens (Contact Author)

University of Bremen - Department of Business Administration ( email )

Bremen, D-28359
Germany

Thorsten Poddig

University of Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany

Christian Fieberg

University of Bremen - Department of Business Administration ( email )

Bremen, D-28359
Germany

HOME PAGE: http://www.fiwi.uni-bremen.de

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