Business and Financial Indicators: What are the Determinants of Default Probability Changes?

Rapport Rapport de recherche Business and Financial Indicators: What are the Determinants of Default Probability Changes? eng 2008 author Couderc Fabien 547403 author Renault Olivier author Scaillet Olivier 0000-0002-3948-6891 134311 This paper investigates some common determinants of default probability changes of individual firms using Standard & Poor's ratings database. We analyze and quantify the responses of hazard rates to changes in various economic variables, namely financial markets, business cycle and credit indicators, and examine their persistency. First, we show that including non-financial information largely improves the poor explanatory power of financial-based factor models. More importantly, in comparison with market factors, business and credit factors become dominant as the issuer quality decreases. Second, we highlight the benefits of past information. Our results prove that both past shocks and subsequent economic trends are of prime importance in explaining probability changes. To draw these conclusions, we introduce a semi-parametric framework accommodating the continuous nature of probability changes and ageing effects. It allows us to recover default probabilities over any desired time horizon. Dewey 332/658 Dewey 330/650 Cahiers de recherche 2008.07 9 Faculté d'économie et de management S false 83c17ad0-23c5-473c-9a99-0e37b93a5cea Report Public file1.pdf 689302 application/pdf openAccess Faculté d'économie et de management

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Business and Financial Indicators: What are the Determinants of Default Probability Changes?				2008	612	2,015

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Couderc, Fabien