Working Paper: NBER ID: w10743
Authors: Darrell Duffie; Ke Wang
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 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.
Keywords: corporate bankruptcy; failure prediction; stochastic covariates; maximum likelihood estimation
JEL Codes: C41; G33; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Distance to default (Y20) | Failure intensity (L15) |
| U.S. personal income growth (D31) | Failure probabilities (C29) |
| Distance to default (Y20) | Term structure of future failure hazard rates (C41) |
| U.S. personal income growth (D31) | Term structure of future failure hazard rates (C41) |