Multi-Period Corporate Default Prediction with Stochastic Covariates

FDIC Center For Financial Research Working Paper No. 2006-05

44 Pages Posted: 23 May 2006

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Leandro Saita

Independent

Ke Wang

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 2005

Abstract

We provide maximum likelihood estimators of term structures of conditional probabilities of corporate default, incorporating the dynamics of firm-specific and macroeconomic covariates. For U.S. Industrial firms, based on over 390,000 firm-months of data spanning 1980 to 2004, the level and shape of the estimated term structure of conditional future default probabilities depends on a firm's distance to default (a volatility-adjusted measure of leverage), on the firm's trailing stock return, on trailing S&P 500 returns, and on U.S. interest rates, among other covariates. Variation in a firm's distance to default has a substantially greater effect on the term structure of future default hazard rates than does a comparatively significant change in any of the other covariates. Default intensities are estimated to be lower with higher short-term interest rates. The out-of-sample predictive performance of the model is an improvement over that of other available models.

Keywords: default, bankruptcy, duration analysis, doubly stochastic

JEL Classification: C41, G33, E44

Suggested Citation

Duffie, James Darrell and Saita, Leandro and Wang, Ke, Multi-Period Corporate Default Prediction with Stochastic Covariates (September 2005). FDIC Center For Financial Research Working Paper No. 2006-05. Available at SSRN: https://ssrn.com/abstract=903784 or http://dx.doi.org/10.2139/ssrn.903784

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
Knight Management Center
Stanford, CA 94305-7298
United States
650-723-1976 (Phone)
650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leandro Saita (Contact Author)

Independent

No Address Available

Ke Wang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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