A varying-coefficient default model
In this paper, a default prediction method based on the discrete-time varying-coefficient hazard model (DVHM) is proposed. The new model is constructed by replacing the constant coefficients of firm-specific predictors in the discrete-time hazard model (DHM; see Shumway, 2001; and Chava & Jarrow, 2004) with the smooth functions of macroeconomic variables. Thus, it allows the effects of those firm-specific predictors on the default prediction to change with the macroeconomic dynamics (Pesaran, Schuermann, Treutler, & Weiner, 2006). The coefficient functions in the new model are estimated by a local likelihood approach. One real panel dataset is used to illustrate the proposed methodology. Using an expanding rolling window approach, the empirical results confirm that DVHM has a better and more robust performance than the usual DHM, in the sense that it yields more accurate predicted numbers of defaults and predictive intervals through out-of-sample analysis. Thus, the proposed model is a useful alternative for studying default losses on portfolios.
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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 28 (2012)
Issue (Month): 3 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/ijforecast|
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.:
- Duffie, Darrell & Saita, Leandro & Wang, Ke, 2007.
"Multi-period corporate default prediction with stochastic covariates,"
Journal of Financial Economics,
Elsevier, vol. 83(3), pages 635-665, March.
- Darrel Duffie & Leandro Saita & Ke Wang, 2005. "Multi-Period Corporate Default Prediction With Stochastic Covariates," CIRJE F-Series CIRJE-F-373, CIRJE, Faculty of Economics, University of Tokyo.
- Darrel Duffie & Leandro Saita & Ke Wang, 2005. "Multi-Period Corporate Default Prediction With Stochastic Covariates," CARF F-Series CARF-F-047, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Darrell Duffie & Leandro Siata & Ke Wang, 2006. "Multi-Period Corporate Default Prediction With Stochastic Covariates," NBER Working Papers 11962, National Bureau of Economic Research, Inc.
- Darrell Duffie & Andreas Eckner & Guillaume Horel & Leandro Saita, 2009. "Frailty Correlated Default," Journal of Finance, American Finance Association, vol. 64(5), pages 2089-2123, October.
- Darrell DUFFIE & Andreas ECKNER & Guillaume HOREL & Leandro SAITA, "undated". "Frailty Correlated Default," Swiss Finance Institute Research Paper Series 08-44, Swiss Finance Institute.
- Pesaran, M. Hashem & Schuermann, Til & Treutler, Bjorn-Jakob & Weiner, Scott M., 2006. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1211-1261, August.
- M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & April, "undated". "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Center for Financial Institutions Working Papers 03-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & M. Hashem Pesaran, 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," CESifo Working Paper Series 995, CESifo Group Munich.
- Pesaran, M.H. & Schuermann, T. & Treutler, B-J. & Weiner, S.M., 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Cambridge Working Papers in Economics 0330, Faculty of Economics, University of Cambridge.
- Marquering, Wessel & Verbeek, Marno, 2004. "The Economic Value of Predicting Stock Index Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 407-429, June.
- Wessel Marquering & Marno Verbeek, 2000. "The Economic Value of Predicting Stock Index Returns and Volatility," Working Papers Department of Economics ces0020, KU Leuven, Faculty of Economics and Business, Department of Economics.
- Marquering, W.A. & Verbeek, M.J.C.M., 2001. "The Economic Value of Predicting Stock Index Returns and Volatility," ERIM Report Series Research in Management ERS-2001-75-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
- Marquering, W. & Verbeek, M.J.C.M., 2000. "The Economic Value of Predicting Stock Index Returns and Volatility," Discussion Paper 2000-78, Tilburg University, Center for Economic Research.
- John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
- Campbell, John Y. & Hilscher, Jens & Szilagyi, Jan, 2005. "In search of distress risk," Discussion Paper Series 1: Economic Studies 2005,27, Deutsche Bundesbank, Research Centre.
- John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2005. "In Searach of Distress Risk," Harvard Institute of Economic Research Working Papers 2081, Harvard - Institute of Economic Research.
- Szilagyi, Jan & Hilscher, Jens & Campbell, John, 2008. "In Search of Distress Risk," Scholarly Articles 3199070, Harvard University Department of Economics.
- John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2006. "In Search of Distress Risk," NBER Working Papers 12362, National Bureau of Economic Research, Inc.
- Jianqing Fan & Qiwei Yao & Zongwu Cai, 2003. "Adaptive varying-coefficient linear models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(1), pages 57-80.
- Jianqing Fan & Qiwei Yao & Zongwu Cai, 2000. "Adaptive varying-coefficient linear models," LSE Research Online Documents on Economics 6865, London School of Economics and Political Science, LSE Library.
- Jianqing Fan & Qiwei Yao & Zongwu Cai, 2003. "Adaptive varying co-efficient linear models," LSE Research Online Documents on Economics 5885, London School of Economics and Political Science, LSE Library.
- Zongwu Cai & Jianqin Fan & Qiwei Yao, 2000. "Adaptive Varying-Coefficient Linear Models," STICERD - Econometrics Paper Series 388, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Chung-Hua Shen & Hsiang-Lin Chih, 2007. "Earnings Management and Corporate Governance in Asia's Emerging Markets," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(5), pages 999-1021, 09.
- Ruey-Ching Hwang & Jhao-Siang Siao & Huimin Chung & C. Chu, 2011. "Assessing bankruptcy prediction models via information content of technical inefficiency," Journal of Productivity Analysis, Springer, vol. 36(3), pages 263-273, December.
- Wang, Lifeng & Li, Hongzhe & Huang, Jianhua Z., 2008. "Variable Selection in Nonparametric Varying-Coefficient Models for Analysis of Repeated Measurements," Journal of the American Statistical Association, American Statistical Association, vol. 103(484), pages 1556-1569.
- Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- repec:bla:joares:v:18:y:1980:i:1:p:109-131 is not listed on IDEAS
- repec:bla:joares:v:22:y:1984:i::p:59-82 is not listed on IDEAS
- Guttler, Andre & Wahrenburg, Mark, 2007. "The adjustment of credit ratings in advance of defaults," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 751-767, March.
- Ruey-Ching Hwang & K. F. Cheng & Jack C. Lee, 2007. "A semiparametric method for predicting bankruptcy," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(5), pages 317-342.
- Kauermann, Goran, 2005. "Penalized spline smoothing in multivariable survival models with varying coefficients," Computational Statistics & Data Analysis, Elsevier, vol. 49(1), pages 169-186, April.
- Li, Qi, et al, 2002. "Semiparametric Smooth Coefficient Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 412-422, July.
- Sudheer Chava & Catalina Stefanescu & Stuart Turnbull, 2011. "Modeling the Loss Distribution," Management Science, INFORMS, vol. 57(7), pages 1267-1287, July.
- Cheng, Ming-Yen & Zhang, Wenyang & Chen, Lu-Hung, 2009. "Statistical Estimation in Generalized Multiparameter Likelihood Models," Journal of the American Statistical Association, American Statistical Association, vol. 104(487), pages 1179-1191.
- Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 831-868, 04.
- K. F. Cheng & C. K. Chu & Ruey-Ching Hwang, 2010. "Predicting bankruptcy using the discrete-time semiparametric hazard model," Quantitative Finance, Taylor & Francis Journals, vol. 10(9), pages 1055-1066.
- Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
- Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
- 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.
- Stefanescu, Catalina & Tunaru, Radu & Turnbull, Stuart, 2009. "The credit rating process and estimation of transition probabilities: A Bayesian approach," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 216-234, March. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:intfor:v:28:y:2012:i:3:p:675-688. 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: (Dana Niculescu)
If references are entirely missing, you can add them using this form.