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Default prediction with dynamic sectoral and macroeconomic frailties

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  • Chen, Peimin
  • Wu, Chunchi
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    Abstract

    This paper extends the macroeconomic frailty model to include sectoral frailty factors that capture default correlations among firms in a similar business. We estimate sectoral and macroeconomic frailty factors and their effects on default intensity using the data for Japanese firms from 1992 to 2010. We find strong evidence for the presence of sectoral frailty factors even after accounting for the effects of observable covariates and macroeconomic frailty on default intensity. The model with sectoral frailties performs better than that without. Results show that accounting for the sources of unobserved sectoral default risk covariations improves the accuracy of default probability estimation.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 40 (2014)
    Issue (Month): C ()
    Pages: 211-226

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    Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:211-226

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Default risk; Hazard rate function; Frailty; Distance to default; Tail loss; Monte Carlo expectations maximization (EM); Gibbs sampler;

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