Examining what best explains corporate credit risk: accounting-based versus market-based models
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BankruptcyCredit default swaps
Credit risk
Distance-to-default
Publication date
2012-04Abstract
Using a sample of 2,186 credit default swap (CDS) spreads quoted in the European market during the period
2002-2009, this paper empirically analyzes which model ¿ accounting- or market-based ¿ better explains
corporate credit risk. We find that there is little difference in the explanatory power of the two approaches.
Our results suggest that both accounting and market data complement one other and thus that a
comprehensive model that includes both types of variables appears to be the best option for explaining credit
risk. We also show that the explanatory power of accounting- and market-based variables for measuring
credit risk is particularly strong during periods of high uncertainty, as experienced in the recent financial
crisis, and that it decreases as the CDS contract matures. Finally, the comprehensive model continues to show
the best results when using the credit rating as the proxy for credit risk, but accounting variables currently
appear to have a more importan ...
Using a sample of 2,186 credit default swap (CDS) spreads quoted in the European market during the period
2002-2009, this paper empirically analyzes which model ¿ accounting- or market-based ¿ better explains
corporate credit risk. We find that there is little difference in the explanatory power of the two approaches.
Our results suggest that both accounting and market data complement one other and thus that a
comprehensive model that includes both types of variables appears to be the best option for explaining credit
risk. We also show that the explanatory power of accounting- and market-based variables for measuring
credit risk is particularly strong during periods of high uncertainty, as experienced in the recent financial
crisis, and that it decreases as the CDS contract matures. Finally, the comprehensive model continues to show
the best results when using the credit rating as the proxy for credit risk, but accounting variables currently
appear to have a more important role than the market variables.
Descripción
Clasificación JEL: C52; G13; G33; M41