Forecasting Bankruptcy with Incomplete Information
AbstractWe propose new specifications that explicitly account for information noise in the input data of bankruptcy hazard models. The specifications are motivated by a theory of modeling credit risk with incomplete information (Duffie and Lando ). Based on over 2 million firm-months of data during 1979-2012, we demonstrate that our proposed specifications significantly improve both in-sample model fit and out-of-sample forecasting accuracy. The improvements in forecasting accuracy are persistent throughout the 10-year holdout periods. The improvements are also robust to empirical setup, and are more substantial in cases where information quality is a more serious problem. Our findings provide strong empirical support for using our proposed hazard specifications in credit risk research and industry applications. They also reconcile conflicting empirical results in the literature.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 55024.
Date of creation: 28 May 2013
Date of revision: 31 Mar 2014
Credit Risk Modeling; Incomplete Information; Hazard Models; Bankruptcy Forecast; Probability of Default (PD); Forecasting Accuracy; Intensity-based Models; Reduced-form Models; Duration Analysis; Survival Analysis;
Find related papers by JEL classification:
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-18 (All new papers)
- NEP-CTA-2014-04-18 (Contract Theory & Applications)
- NEP-FOR-2014-04-18 (Forecasting)
- NEP-RMG-2014-04-18 (Risk Management)
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