Forecasting Cross-Sections of Frailty-Correlated Default
Siem Jan Koopman,
Andre Lucas and
Bernd Schwaab
No 08-029/4, Tinbergen Institute Discussion Papers from Tinbergen Institute
Abstract:
We propose a novel econometric model for estimating and forecasting cross-sections of time-varying conditional default probabilities. The model captures the systematic variation in corporate default counts across e.g. rating and industry groups by using dynamic factors from a large panel of selected macroeconomic and financial data as well as common unobserved risk factors. All factors are statistically and economically significant and together capture a large part of the time-variation in observed default rates. In this framework we improve the out-of-sample forecasting accuracy associated with conditional default probabilities by about 10-35% in terms of Mean Absolute Error, particularly in years of default stress.
Keywords: Non-Gaussian Panel Data; Common Factors; Unobserved Components; Forecasting Conditional Default Probabilities (search for similar items in EconPapers)
JEL-codes: C33 G21 (search for similar items in EconPapers)
Date: 2008-03-20
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Citations: View citations in EconPapers (4)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20080029
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