The performance of hybrid models in the assessment of default risk

Mondher Bellalah, Sami Zouari and Olivier Levyne

Economic Modelling, 2016, vol. 52, issue PA, 259-265

Abstract: This paper combines fundamental analysis and contingent claim analysis into a hybrid model of credit risk measurement. Our database consists of French companies listed on the Paris Stock Exchange (Euronext Paris). Our objective is to assess how the combination of continuous assessments provided by the market and the values derived from financial statements improve our ability to forecast the default probability. During the first phase, the default probability is estimated using both methods separately, and subsequently, the default probability of the structural model is integrated at each point in time in the non-structural model as an additional explanatory variable. The appeal of the hybrid model allows the default probability to be continuously updated by integrating market information via the probabilities of default extracted from the structural model. Our results indicate that default probabilities extracted from the structural model contribute significantly in explaining default risk when included in a hybrid model with accounting variables.

Keywords: Default risk; Structural models; Non-structural model; Hybrid model; Probit model; Default probability (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:52:y:2016:i:pa:p:259-265

DOI: 10.1016/j.econmod.2014.10.051

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