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Default Prediction with Industry-Specific Default Heterogeneity Indicators Based on the Forward Intensity Model

Authors :
Zhengfang Ni
Minghui Jiang
Wentao Zhan
Source :
Axioms, Vol 12, Iss 4, p 402 (2023)
Publication Year :
2023
Publisher :
MDPI AG, 2023.

Abstract

When predicting the defaults of a large number of samples in a region, this will be affected by industry default heterogeneity. To build a credit risk model that is more suitable for Chinese-listed firms, which have highly industry-specific default heterogeneity, we extend the forward intensity model to predict the defaults of Chinese-listed firms with information about the default heterogeneity of industries. Compared with the original model, we combine the Bayes approach with the forward intensity model to generate time-varying industry-specific default heterogeneity indicators. Our model can capture co-movements of different industries that cannot be observed based on the original forward intensity model so that the model can flexibly adjust the firm’s PD according to the industry. In addition, we also consider the impact of default heterogeneity in other industries by studying the influence of the level and trends of other industries’ default heterogeneity on a firm’s credit risk. Finally, we compute PDs for 4476 firms from January 2001 to December 2019 for 36 prediction horizons. The extended model improves the prediction accuracy ratios both for the in-sample and out-of-sample firm’s PDs for all 36 horizons. Almost all the accuracy ratios of the prediction horizons’ PDs are increased by more than 6%. In addition, our model also reduces the gap between the aggregated PDs and the realized number of defaults. Our industry-specific default heterogeneity indicator is helpful to improve the model’s performance, especially for predicting defaults in a large portfolio, which is of significance for credit risk management in China and other regions.

Details

Language :
English
ISSN :
20751680
Volume :
12
Issue :
4
Database :
Directory of Open Access Journals
Journal :
Axioms
Publication Type :
Academic Journal
Accession number :
edsdoj.1f568cb0604443f4ba056ddd6c25f419
Document Type :
article
Full Text :
https://doi.org/10.3390/axioms12040402