Multi-Period Corporate Failure Prediction with Stochastic Covariates (2004)
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BibTeX
@MISC{Duffie04multi-periodcorporate,
author = {Darrell Duffie and Ke Wang and Susan Athey and Richard Cantor and Brad Effron and Robert Geske and Michael Gordy},
title = {Multi-Period Corporate Failure Prediction with Stochastic Covariates},
year = {2004}
}
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Abstract
We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on over 28,000 firm-quarters of data spanning 1971 to 2001, of significant dependence of the level and shape of the term structure of conditional future bankruptcy probabilities on a firm's distance to default (a volatility-adjusted measure of leverage) and on U.S. personal income growth, among other covariates. Variation in a firm's distance to default has a greater relative e#ect on the term structure of future failure hazard rates than does a comparatively sized change in U.S. personal income growth, especially at dates more than a year into the future.
