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Multi-period corporate default prediction with stochastic covariates

  • Duffie, Darrell
  • Saita, Leandro
  • Wang, Ke

We provide maximum likelihood estimators of term structures of conditional probabilities of corporate default, incorporating the dynamics of firm-specific and macroeconomic covariates. For U.S. Industrial firms, based on over 390,000 firm-months of data spanning 1979 to 2004, the level and shape of the estimated term structure of conditional future default probabilities depends on a firm's distance to default (a volatility-adjusted measure of leverage), on the firm's trailing stock return, on trailing S&P 500 returns, and on U.S. interest rates, among other covariates. Distance to default is the most influential covariate. Default intensities are estimated to be lower with higher short-term interest rates. The out-of-sample predictive performance of the model is an improvement over that of other available models.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 83 (2007)
Issue (Month): 3 (March)
Pages: 635-665

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Handle: RePEc:eee:jfinec:v:83:y:2007:i:3:p:635-665
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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