Dynamic analysis of the forecasting bankruptcy under presence of unobserved heterogeneity

Ilyes Abid (), Farid Mkaouar and Olfa Kaabia
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Ilyes Abid: ISC Paris Business School
Farid Mkaouar: CNAM
Olfa Kaabia: INSEEC Business School

Annals of Operations Research, 2018, vol. 262, issue 2, No 2, 256 pages

Abstract: Abstract This paper illustrates the importance of referring to a dynamic approach when forecasting firms bankruptcies, paying a particular attention to French SMEs. Based on Shummay’s (J Bus 74:101–124, 2001), we build a duration model and extend it by incorporating unobservable heterogeneity. Moreover, we resort to a dynamic dichotomous specification in which “right side” censored data are taken into account. We emphasize the complexity of the calculations of integrals that must be implemented and show how to overcome this challenge by applying the Geweke, Hajivassiliou and Keane algorithm which involves the technique of the simulated maximum likelihood. The findings prove that our dynamic approach, which integrates macroeconomic variables and takes account of both random effects and exogenous shocks, provides credible results. Besides, our method provides the predictive content of macroeconomic variables and the unobservable heterogeneity, which is helpful in forecasting firms bankruptcies.

Keywords: Bankruptcy default; Unobserved heterogeneity factors; Duration model; Multi-period logit model; Maximum simulated likelihood estimation; GHK algorithm (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10479-016-2143-2

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