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Multi-Period Corporate Default Prediction With Stochastic Covariates

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Author Info

  • Darrel Duffie

    (Graduate School of Business, Stanford University)

  • Leandro Saita

    (Graduate School of Business, Stanford University)

  • Ke Wang

    (Faculty of Economics, University of Tokyo)

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    Abstract

    We provide maximum likelihood estimators of term structures of conditional probabilities of corporate default, incorporating the dynamics of firm-specific and macroeconomic covariates. For U.S. Industrial firms, based on over 390,000 firm-months of data spanning 1979 to 2004, the level and shape of the estimated term structure of conditional future default probabilities depends on a firm?s distance to default (a volatility-adjusted measure of leverage), on the firm?s trailing stock return, on trailing S& P 500 returns, and on U.S. interest rates, among other covariates. Variation in a firm?s distance to default has a substantially greater e ect on the term structure of future default hazard rates than does a comparatively significant change in any of the other covariates. Default intensities are estimated to be lower with higher short-term interest rates. The out-of-sample predictive performance of the model is an improvement over that of other available models.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/48.pdf
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    Bibliographic Info

    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-047.

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    Length: 45 pages
    Date of creation: Sep 2005
    Date of revision:
    Handle: RePEc:cfi:fseres:cf047

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    Cited by:
    1. Dragon Tang & Hong Yan, 2006. "Macroeconomic Conditions, Firm Characteristics, and Credit Spreads," Journal of Financial Services Research, Springer, vol. 29(3), pages 177-210, June.
    2. Felipe Zurita L., 2008. "Bankruptcy Prediction for Chilean Companies," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(1), pages 93-116, April.
    3. Felipe Zurita, 2008. "La Predicción de la Insolvencia de Empresas Chilenas," Documentos de Trabajo 336, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Francis A. Longstaff & Arvind Rajan, 2008. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," Journal of Finance, American Finance Association, vol. 63(2), pages 529-563, 04.
    5. Das, Sanjiv R. & Hanouna, Paul, 2009. "Implied recovery," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1837-1857, November.
    6. Sanjiv R. Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2007. "Common Failings: How Corporate Defaults Are Correlated," Journal of Finance, American Finance Association, vol. 62(1), pages 93-117, 02.

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