Survival Models for Credit Risk Estimation in the context of SME

The credit risk is the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Using a large dataset of corporate balance sheets we develop a survival model to predict default. Unlike previous works, we consider forecasts of probability of default for small corporate, we take into account regional macroeconomic conditions as well as national macroeconomic indicators and we use a large sample of balance sheet. We define our model after a series of steps designed to select only the significant variables; we examine the scale of the continuous covariates in the preliminary main effect model and we apply, when required, appropriate transformations to respect the linearity in the log hazard. Last but not least, we check the proportionality hazard assumption.