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Measuring Corporate Default Risk$
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Darrell Duffie

Print publication date: 2011

Print ISBN-13: 9780199279234

Published to Oxford Scholarship Online: September 2011

DOI: 10.1093/acprof:oso/9780199279234.001.0001

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The Default Intensities of Public Corporations

The Default Intensities of Public Corporations

(p.25) 4 The Default Intensities of Public Corporations
Measuring Corporate Default Risk

Darrell Duffie

Oxford University Press

This chapter presents estimates of a dynamic model of the term structures of conditional default probabilities of North American non-financial corporations between 1970 and 2004. The results show the significant dependence of default probabilities on a firm's distance to default (a volatility-adjusted leverage measure) and, to a lesser extent, on the firm's trailing stock return as well as various macroeconomic variables. The estimated shape of the term structure of conditional default probabilities reflects the time-series behavior of the covariates, especially leverage targeting by firms and mean reverting macro-economic performance. The estimated term structures of default hazard rates are typically upward-sloping at business-cycle peaks, and downward sloping at business-cycle troughs, to a degree that depends on corporate leverage relative to its long-run target. Typical peak-to-trough variation in distances to default has a larger and more persistent impact on default probabilities than does business-cycle variation of the macro-covariates (after controlling for distance to default).

Keywords:   corporation, distance to default, time series, covariates, business cycle, default, empirical estimation, default intensity, bankruptcy

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