Predicting corporate credit risk: Network contagion via trade credit

Claudia Berloco, Gianmarco De Francisci Morales, Daniele Frassineti, Greta Greco, Hashani Kumarasinghe, Marco Lamieri, Emanuele Massaro, Arianna Miola and Shuyi Yang

PLOS ONE, 2021, vol. 16, issue 4, 1-29

Abstract: Trade credit is a payment extension granted by a selling firm to its customer. Companies typically respond to late payments from their customers by delaying payments to suppliers, thus generating a ripple through the transaction network. Therefore, trade credit is as a potential vehicle of propagation of losses in case of default events. The goal of this work is to leverage information on the trade credit among connected firms to predict imminent defaults of firms. We use a unique dataset of client firms of a major Italian bank to investigate firm bankruptcy between October 2016 to March 2018. We develop a model to capture network spillover effects originating from the supply chain on the probability of default of each firm via a sequential approach: the output of a first model component on single firm features is used in a subsequent model which captures network spillovers. While the first component is the standard econometrics way to predict such dynamics, the network module represents an innovative way to look into the effect of trade credit on default probability. This module looks at the transaction network of the firm, as inferred from the payments transiting via the bank, in order to identify the trade partners of the firm. By using several features extracted from the network of transactions, this model is able to predict a large fraction of the defaults, thus showing the value hidden in the network information. Finally, we merge firm and network features with a machine learning model to create a ‘hybrid’ model, which improves the recall for the task by almost 20 percentage points over the baseline.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0250115 (text/html)
https://journals.plos.org/plosone/article/file?id= ... 50115&type=printable (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0250115

DOI: 10.1371/journal.pone.0250115

Access Statistics for this article

More articles in PLOS ONE from Public Library of Science
Bibliographic data for series maintained by plosone ().