Predicting and Pricing the Probability of Default

44 Pages Posted: 13 Nov 2005

See all articles by Alessio Saretto

Alessio Saretto

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: March 10, 2005

Abstract

In this paper we study how corporate bond defaults can be predicted using financial ratios and how the estimated default probability relates to the Fama-French factors, HML and SMB. We propose a default forecast model that outperforms existing models in correctly classifying both Default and Non-Default firms. Using the default probabilities generated by our model, we find evidences that support the interpretation of HML as a distress factor. Factor loadings are positively related to the firm default probabilities. HML is negatively correlated with changes in the level of aggregate financial distress.

Keywords: Default, Hazard Rate, Distress Risk

Suggested Citation

Saretto, Alessio, Predicting and Pricing the Probability of Default (March 10, 2005). AFA 2006 Boston Meetings Paper, Available at SSRN: https://ssrn.com/abstract=556226 or http://dx.doi.org/10.2139/ssrn.556226

Alessio Saretto (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2,113
Abstract Views
8,363
rank
10,019
PlumX Metrics