Predicting bankruptcy using the discrete-time semiparametric hazard model

K. F. Cheng, C. K. Chu and Ruey-Ching Hwang

Quantitative Finance, 2010, vol. 10, issue 9, 1055-1066

Abstract: The usual bankruptcy prediction models are based on single-period data from firms. These models ignore the fact that the characteristics of firms change through time, and thus they may suffer from a loss of predictive power. In recent years, a discrete-time parametric hazard model has been proposed for bankruptcy prediction using panel data from firms. This model has been demonstrated by many examples to be more powerful than the traditional models. In this paper, we propose an extension of this approach allowing for a more flexible choice of hazard function. The new method does not require the assumption of a parametric model for the hazard function. In addition, it also provides a tool for checking the adequacy of the parametric model, if necessary. We use real panel datasets to illustrate the proposed method. The empirical results confirm that the new model compares favorably with the well-known discrete-time parametric hazard model.

Keywords: Discrete-time hazard model; Local likelihood; Out-of-sample error rate; Panel data; Semiparametric model (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (11)

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DOI: 10.1080/14697680902814274

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