Analysis of delinquent firms using multi-state transitions
AbstractThis paper analyzes the behavior of firms with defaulted credits in terms of recovery or extinction. By defining classes for the severity of default, survival models for the multiple transitions from each class are estimated. The models are used to simulate the evolution of a firm’s credit conditional on its characteristics. Estimates for the expected recovery or extinction rates are constructed from these simulations. They show that (i) the severity of default strongly influences the probability of extinction; (ii) for less severe default episodes, recovery is faster than extinction, and the opposite is true for more severe defaults; (iii) larger firms tend to display better outcomes; (iv) and the number of employees is the single most important determinant of the time profile of the extinction/recovery process. Estimates of a loss given default measure suggest that the supervision recommendations found in the literature are appropriate.
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Bibliographic InfoPaper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200505.
Date of creation: 2005
Date of revision:
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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- Bonfim, Diana, 2009.
"Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics,"
Journal of Banking & Finance,
Elsevier, vol. 33(2), pages 281-299, February.
- Diana Bonfim, 2006. "Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Diana Bonfim, 2007. "Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics," Working Papers w200707, Banco de Portugal, Economics and Research Department.
- Diana Bonfim & Daniel Dias & Christine Richmond, 2011. "What Happens After Default? Stylized Facts on Access to Credit," Working Papers w201101, Banco de Portugal, Economics and Research Department.
- Bonfim, Diana & Dias, Daniel A. & Richmond, Christine, 2012. "What happens after corporate default? Stylized facts on access to credit," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2007-2025.
- Antão, Paula & Lacerda, Ana, 2011. "Capital requirements under the credit risk-based framework," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1380-1390, June.
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