Enhanced credit default models for heterogeneous SME segments

Dean Fantazzini, Maria Elena DeGiuli, Silvia Figini and Paolo Giudici
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Maria Elena DeGiuli: Faculty of Economics, University of Pavia (Italy)
Silvia Figini: Department of Statistics and Applied Economics, University of Pavia, (Italy)
Paolo Giudici: Department of Statistics and Applied Economics, University of Pavia, (Italy)

Journal of Financial Transformation, 2009, vol. 25, 31-39

Abstract: Considering the attention placed on SMEs in the new Basel Capital Accord, we propose a set of Bayesian and classical longitudinal models to predict SME default probability, taking unobservable firm and business sector heterogeneities as well as analysts’ recommendations into account. We compare this set of models in terms of forecasting performances, both in-sample and out-of-sample. Furthermore, we propose a novel financial loss function to measure the costs of an incorrect classification, including both the missed profits and the losses given defaults sustained by the bank. As for the in-sample results, we found evidence that our proposed longitudinal models outperformed a simple pooled logit model. Besides, Bayesian models performed even better than classical models. As for the out-of-sample performances, the models were much closer, both in terms of key performance indicators and financial loss functions, and the pooled logit model could not be outperformed

Keywords: Longitudinal models; Bayesian panel models; Credit risk; Default probability; Loss function (search for similar items in EconPapers)
JEL-codes: C15 C32 G24 G32 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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