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Multi-Period Corporate Default Prediction With Stochastic Covariates

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  • Darrell Duffie
  • Leandro Siata
  • Ke Wang

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. Distance to default is the most influential covariate. 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11962.

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Date of creation: Jan 2006
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Handle: RePEc:nbr:nberwo:11962

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