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IAQF & Thalesians Seminar Series: A Joint Model of Failures and Credit Ratings A webinar by Rainer Hirk

  • 08 Mar 2021
  • 12:30 PM - 2:00 PM (EST)
  • Zoom Webinar

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Abstract:

We propose a novel framework for credit risk modeling, where default or failure information together with rating or expert information are jointly incorporated in the model. These sources of information are modeled as response variables in a multivariate ordinal regression model estimated by a composite likelihood procedure. The proposed framework provides probabilities of default conditional on the rating information observed at the beginning of a predetermined period and is able to account for missing failure or credit rating information. Our approach is the first that consistently combines failure prediction models, where default indicators are used as responses, with so called “shadow rating models”, where the responses are estimates of default probabilities usually derived from the leading credit rating agencies. In our empirical analysis we apply the proposed framework to a data set of US firms over the period from 1985 to 2014. Different sets of financial ratios constructed from financial statements and market information are selected as bankruptcy predictors in line with standard literature in failure prediction modeling. We find that the joint model of failures and credit ratings outperforms state-of-the-art failure prediction models and shadow rating approaches in terms of prediction accuracy and discriminatory power.


Bio:

Rainer Hirk is a postdoctoral researcher at the Institute for Statistics and Mathematics at Vienna University  of Economics and Business. His fields of interest are applied statistics and credit risk modeling. He holds a PhD in Economics and Social Sciences with a main focus on statistics from Vienna University of Economics and Business (WU). During his PhD studies he particularly focused on multivariate ordinal models. He is the author of the R package mvord for modeling multivariate ordinal regression models. Also, he received an MSc in Financial and Actuarial mathematics from Vienna University of Technology and an MSc in Quantitative Finance from Vienna University of Economics and Business.