Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5088877 | Journal of Banking & Finance | 2014 | 12 Pages |
Abstract
We conduct a thorough analysis on the role played by the unobserved systematic risk factor in default prediction. We find that this latent factor outweighs the observed systematic risk factors and can substantially improve the in-sample predictive accuracy at the firm, rating group, and aggregate levels. Thus it might be helpful to include the unobserved systematic risk factor when simulating portfolio credit losses. However, we also find that this factor only marginally improves out-of-sample model performance. Therefore, although the models we investigated all show reasonably good ability to rank order firms by default risk, accurate prediction of default rate remains challenging even when the unobserved systematic risk factor is considered.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Min Qi, Xiaofei Zhang, Xinlei Zhao,