Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86937
Authors: 
Koopman, Siem Jan
Lucas, André
Schwaab, Bernd
Year of Publication: 
2008
Series/Report no.: 
Tinbergen Institute Discussion Paper 08-029/4
Abstract: 
We propose a novel econometric model for estimating and forecasting cross-sections of time-varying conditional default probabilities. The model captures the systematic variation in corporate default counts across e.g. rating and industry groups by using dynamic factors from a large panel of selected macroeconomic and financial data as well as common unobserved risk factors. All factors are statistically and economically significant and together capture a large part of the time-variation in observed default rates. In this framework we improve the out-of-sample forecasting accuracy associated with conditional default probabilities by about 10-35% in terms of Mean Absolute Error, particularly in years of default stress.
Subjects: 
Non-Gaussian Panel Data
Common Factors
Unobserved Components
Forecasting Conditional Default Probabilities
JEL: 
C33
G21
Document Type: 
Working Paper

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