Arbeitspapier

Incorporating the dynamics of leverage into default prediction

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A firm's current leverage ratio is one of the core characteristics of credit quality used in statistical default prediction models. Based on the capital structure literature, which shows that leverage is mean-reverting to a target leverage, we forecast future leverage ratios and include them in the set of default risk drivers. The analysis is done with a discrete duration model. Out-of-sample analysis of default events two to five years ahead reveals that the discriminating power of the duration model increases substantially when leverage forecasts are included. We further document that credit ratings contain information beyond the one contained in standard variables but that this information is unrelated to forecasts of leverage ratios.

Language: Englisch

Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2009,024

Classification: Wirtschaft
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Bankruptcy; Liquidation

Subject: default prediction
discrete duration model
leverage targeting
mean reversion
credit rating
Kreditwürdigkeit
Kreditrisiko
Prognoseverfahren
Kapitalstruktur
Mean Reversion
Theorie

Event: Geistige Schöpfung

(who): Löffler, Gunter
Maurer, Alina

Event: Veröffentlichung

(who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk

(where): Berlin

(when): 2009

Handle: http://hdl.handle.net/10419/25340

Last update: 10.03.2025, 11:42 AM CET

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Object type

Arbeitspapier

Associated

Löffler, Gunter
Maurer, Alina
Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk

Time of origin

2009

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