Times-To-Default:Life Cycle, Global and Industry Cycle Impact
AbstractThis paper studies times-to-default of individual firms across risk classes. Using Standard & Poor’s ratings database we investigate common drivers of default probabilities and address two shortcomings of many papers in the credit literature. First, we identify relevant determinants of default intensities using business cycle and credit market proxies in addition to financial markets indicators, and reveal the time-span of their impacts. We show that misspecifications of financial based factor models are largely corrected by non financial information. Second, we show that past economic conditions are of prime importance in explaining probability changes: current shocks and long term trends jointly determine default probabilities. Finally, we exhibit industry contagion indicators which might be helpful to capture leading and persistency patterns of the default cycle.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp142.
Date of creation: Mar 2005
Date of revision:
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More information through EDIRC
censored durations; proportional hazard; business cycle; credit cycle; default determinants; default prediction;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-14 (All new papers)
- NEP-BEC-2005-05-14 (Business Economics)
- NEP-ENT-2005-05-14 (Entrepreneurship)
- NEP-FIN-2005-05-14 (Finance)
- NEP-RMG-2005-05-14 (Risk Management)
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