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Cure events in default prediction

Listed author(s):
  • Wolter, Marcus
  • Rösch, Daniel
Registered author(s):

    This paper evaluates the resurrection event regarding defaulted firms and incorporates observable cure events in the default prediction of SME. Due to the additional cure-related observable data, a completely new information set is applied to predict individual default and cure events. This is a new approach in credit risk that, to our knowledge, has not been followed yet. Different firm-specific and macroeconomic default and cure-event-influencing risk drivers are identified. The significant variables allow a firm-specific default risk evaluation combined with an individual risk reducing cure probability. The identification and incorporation of cure-relevant factors in the default risk framework enable lenders to support the complete resurrection of a firm in the case of its default and hence reduce the default risk itself. The estimations are developed with a database that contains 5930 mostly small and medium-sized German firms and a total of more than 23000 financial statements over a time horizon from January 2002 to December 2007. Due to the significant influence on the default risk probability as well as the bank’s possible profit prospects concerning a cured firm, it seems essential for risk management to incorporate the additional cure information into credit risk evaluation.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221714003889
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 238 (2014)
    Issue (Month): 3 ()
    Pages: 846-857

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    Handle: RePEc:eee:ejores:v:238:y:2014:i:3:p:846-857
    DOI: 10.1016/j.ejor.2014.04.046
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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