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Multi-Period Corporate Failure Prediction With Stochastic Covariates

Ke Wang and Darrell Duffie

No 747, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on over 28,000 firm-quarters of data spanning 1971 to 2001, of significant dependence of the level and shape of the term structure of conditional future bankruptcy probabilities on a firm's distance to default (a volatility-adjusted measure of leverage) and on U.S. personal income growth, among other covariates. Variation in a firm's distance to default has a greater relative effect on the term structure of future failure hazard rates than does a comparatively sized change in U.S. personal income growth, especially at dates more than a year into the future.

Keywords: duration model; failure intensity; business cycle; doubly stochastic process (search for similar items in EconPapers)
JEL-codes: C41 G33 E44 (search for similar items in EconPapers)
Date: 2004-08-11
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Working Paper: Multi-Period Corporate Failure Prediction With Stochastic Covariates (2004)
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