Default prediction with dynamic sectoral and macroeconomic frailties

Peimin Chen and Chunchi Wu

Journal of Banking & Finance, 2014, vol. 40, issue C, 211-226

Abstract: This paper extends the macroeconomic frailty model to include sectoral frailty factors that capture default correlations among firms in a similar business. We estimate sectoral and macroeconomic frailty factors and their effects on default intensity using the data for Japanese firms from 1992 to 2010. We find strong evidence for the presence of sectoral frailty factors even after accounting for the effects of observable covariates and macroeconomic frailty on default intensity. The model with sectoral frailties performs better than that without. Results show that accounting for the sources of unobserved sectoral default risk covariations improves the accuracy of default probability estimation.

Keywords: Default risk; Hazard rate function; Frailty; Distance to default; Tail loss; Monte Carlo expectations maximization (EM); Gibbs sampler (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:40:y:2014:i:c:p:211-226

DOI: 10.1016/j.jbankfin.2013.11.036

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