Quotation Hirk, Rainer, Vana, Laura, Pichler, Stefan, Hornik, Kurt. 2020. A joint model of failures and credit ratings. Journal of Credit Risk. 16 (4), 1-28.


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Abstract

We propose a novel framework for credit risk modeling, where default or failure information and rating or expert information are jointly incorporated in the model. These sources of information are modeled as response variables in a multivariate ordinal regression model estimated by a composite likelihood procedure. The proposed framework provides probabilities of default conditional on the rating information observed at the beginning of a predetermined period and is able to account for missing failure or credit rating information. Our approach is, to the best of our knowledge, the first that consistently combines failure-prediction models, where default indicators are used as responses, with so-called shadow rating models, where the responses are estimates of default probabilities usually derived from the leading credit rating agencies. In our empirical analysis we apply the proposed framework to a data set of US firms over the period from 1985 to 2014. Different sets of financial ratios constructed from financial statements and market information are selected as bankruptcy predictors in line with the standard literature in failure-prediction modeling. We find that the joint model of failures and credit ratings outperforms state-of-the-art failure-prediction models and shadow rating approaches in terms of prediction accuracy and discriminatory power

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Journal of Credit Risk
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, STRAT-B, WH-B
Language English
Title A joint model of failures and credit ratings.
Volume 16
Number 4
Year 2020
Page from 1
Page to 28
Reviewed? Y
DOI http://dx.doi.org/ 10.21314/JCR.2020.264
Open Access N

Associations

People
Hirk, Rainer (Details)
Vana Gür, Laura (Details)
Pichler, Stefan (Details)
Hornik, Kurt (Details)
Organization
Institute for Statistics and Mathematics IN (Details)
Research Institute for Computational Methods FI (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
1104 Applied mathematics (Details)
1105 Computer software (Details)
1121 Operations research (Details)
1162 Statistics (Details)
1165 Stochastics (Details)
5361 Financial management (Details)
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