Advanced Search
MyIDEAS: Login to save this paper or follow this series

Forecasting Bankruptcy with Incomplete Information

Contents:

Author Info

  • Xu, Xin
Registered author(s):

    Abstract

    We 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 [2001]). 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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://mpra.ub.uni-muenchen.de/55024/
    File Function: original version
    Download Restriction: no

    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55024.

    as in new window
    Length:
    Date of creation: 28 May 2013
    Date of revision: 31 Mar 2014
    Handle: RePEc:pra:mprapa:55024

    Contact details of provider:
    Postal: Schackstr. 4, D-80539 Munich, Germany
    Phone: +49-(0)89-2180-2219
    Fax: +49-(0)89-2180-3900
    Web page: http://mpra.ub.uni-muenchen.de
    More information through EDIRC

    Related research

    Keywords: 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:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Szilagyi, Jan & Hilscher, Jens & Campbell, John, 2008. "In Search of Distress Risk," Scholarly Articles 3199070, Harvard University Department of Economics.
    2. Duffie, Darrell & Saita, Leandro & Wang, Ke, 2007. "Multi-period corporate default prediction with stochastic covariates," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(3), pages 635-665, March.
    3. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, American Finance Association, vol. 23(4), pages 589-609, 09.
    4. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(2), pages 233-250.
    5. Giesecke, Kay, 2004. "Correlated default with incomplete information," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1521-1545, July.
    6. Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
    7. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
    8. Sudheer Chava & Catalina Stefanescu & Stuart Turnbull, 2011. "Modeling the Loss Distribution," Management Science, INFORMS, INFORMS, vol. 57(7), pages 1267-1287, July.
    9. Giesecke, Kay, 2006. "Default and information," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(11), pages 2281-2303, November.
    10. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, Econometric Society, vol. 69(3), pages 633-64, May.
    11. Duan, Jin-Chuan & Sun, Jie & Wang, Tao, 2012. "Multiperiod corporate default prediction—A forward intensity approach," Journal of Econometrics, Elsevier, Elsevier, vol. 170(1), pages 191-209.
    12. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 61(1), pages 105-137, 02.
    13. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers, University of California at Berkeley RPF-259, University of California at Berkeley.
    14. Hilscher, Jens Dietrich & Campbell, John Y. & Szilagyi, Jan, 2011. "Predicting Financial Distress and the Performance of Distressed Stocks," Scholarly Articles 9887619, Harvard University Department of Economics.
    15. Lin, Chen & Ma, Yue & Xuan, Yuhai, 2011. "Ownership structure and financial constraints: Evidence from a structural estimation," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(2), pages 416-431.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:55024. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.