NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Multi-Period Corporate Failure Prediction with Stochastic Covariates

Darrell Duffie, Ke Wang

NBER Working Paper No. 10743
Issued in September 2004
NBER Program(s):   CF   AP

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 effect 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.

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Document Object Identifier (DOI): 10.3386/w10743

Published: Duffie, Darrell, Leandro Saita and Ke Wang. "Multi-Period Corporate Default Prediction with Stochastic Covariates,." Journal of Financial Economics 83 (2007): 635-665.

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