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Particle MCMC in Forecasting Frailty-Correlated Default Models with Expert Opinion

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  • Ha Nguyen

    (Department of Actuarial Studies and Business Analytics, Macquarie Business School, Macquarie University, Sydney, NSW 2109, Australia)

Abstract

Predicting corporate default risk has long been a crucial topic in the finance field, as bankruptcies impose enormous costs on market participants as well as the economy as a whole. This paper aims to forecast frailty-correlated default models with subjective judgements on a sample of U.S. public non-financial firms spanning January 1980–June 2019. We consider a reduced-form model and adopt a Bayesian approach coupled with the Particle Markov Chain Monte Carlo (Particle MCMC) algorithm to scrutinize this problem. The findings show that the 1-year prediction for frailty-correlated default models with different prior distributions is relatively good, whereas the prediction accuracy ratios for frailty-correlated default models with non-informative and subjective prior distributions over various prediction horizons are not significantly different.

Suggested Citation

  • Ha Nguyen, 2023. "Particle MCMC in Forecasting Frailty-Correlated Default Models with Expert Opinion," JRFM, MDPI, vol. 16(7), pages 1-16, July.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:7:p:334-:d:1193913
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    References listed on IDEAS

    as
    1. Drew Creal & Bernd Schwaab & Siem Jan Koopman & Andr� Lucas, 2014. "Observation-Driven Mixed-Measurement Dynamic Factor Models with an Application to Credit Risk," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 898-915, December.
    2. Siem Jan Koopman & André Lucas & Bernd Schwaab, 2012. "Dynamic Factor Models With Macro, Frailty, and Industry Effects for U.S. Default Counts: The Credit Crisis of 2008," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(4), pages 521-532, May.
    3. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
    4. Nguyen, Ha, 2023. "An empirical application of Particle Markov Chain Monte Carlo to frailty correlated default models," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 103-121.
    5. Koopman, Siem Jan & Lucas, André & Schwaab, Bernd, 2011. "Modeling frailty-correlated defaults using many macroeconomic covariates," Journal of Econometrics, Elsevier, vol. 162(2), pages 312-325, June.
    6. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
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