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Title

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

Authors
Renault, Olivier
Year 2008
Collection Cahiers de recherche; 2008.07
Abstract 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.
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COUDERC, Fabien, RENAULT, Olivier, SCAILLET, Olivier. Business and Financial Indicators: What are the Determinants of Default Probability Changes?. 2008 https://archive-ouverte.unige.ch/unige:5719

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Deposited on : 2010-04-15

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