Industry specific defaults

Tae Yeon Kwon and Yoonjung Lee

Journal of Empirical Finance, 2018, vol. 45, issue C, 45-58

Abstract: In this paper, the hidden common factor for a default correlation model is expanded to industry. By introducing industry-specific hidden factors as random effects, a comparison is made of the relative scale of within- and between-industries correlations. Empirical analysis is based on 14,249 U.S. public firms between 1990 and 2014. A comparison study among the without-hidden-factor model, the common-hidden-factor model, and our industry-specific common-factor model show that an industry-specific common factor is necessary for adjusting time and industry specific over- or under-estimation of default probabilities. The Monte Carlo EM algorithm is adopted for model estimation.

Keywords: Intensity credit risk model; Within industry default correlation; Between industries default correlation; Frailty; MCEM (search for similar items in EconPapers)
JEL-codes: C11 C15 C82 G33 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:45:y:2018:i:c:p:45-58

DOI: 10.1016/j.jempfin.2017.10.002

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