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Modeling corporate defaults: Poisson autoregressions with exogenous covariates (PARX)

Agosto, A; Cavaliere, G; Kristensen, D; Rahbek, A; (2016) Modeling corporate defaults: Poisson autoregressions with exogenous covariates (PARX). Journal of Empirical Finance , 38 (Part B) pp. 640-663. 10.1016/j.jempfin.2016.02.007. Green open access

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Abstract

We develop a class of Poisson autoregressive models with exogenous covariates (PARX) that can be used to model and forecast time series of counts. We establish the time series properties of the models, including conditions for stationarity and existence of moments. These results are in turn used in the analysis of the asymptotic properties of the maximum-likelihood estimators of the models. The PARX class of models is used to analyze the time series properties of monthly corporate defaults in the US in the period 1982–2011 using financial and economic variables as exogenous covariates. Results show that our model is able to capture the time series dynamics of corporate defaults well, including the well-known default counts clustering found in data. Moreover, we find that while in general current defaults do indeed affect the probability of other firms defaulting in the future, in recent years economic and financial factors at the macro level are capable to explain a large portion of the correlation of US firm defaults over time.

Type: Article
Title: Modeling corporate defaults: Poisson autoregressions with exogenous covariates (PARX)
Location: Univ Essex, Colchester, ENGLAND
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jempfin.2016.02.007
Publisher version: http://doi.org/10.1016/j.jempfin.2016.02.007
Language: English
Additional information: © 2016 Elsevier B.V. All rights reserved. This manuscript version is made available under a Creative Commons Attribution Non-commercial Non-derivative 4.0 International license (CC BY-NC-ND 4.0). This license allows you to share, copy, distribute and transmit the work for personal and non-commercial use providing author and publisher attribution is clearly stated. Further details about CC BY licenses are available at http://creativecommons.org/ licenses/by/4.0. Access may be initially restricted by the publisher.
Keywords: Social Sciences, Business, Finance, Economics, Business & Economics, Corporate defaults, Count data, Exogenous covariates, Poisson autoregression, Estimation, GARCH, FRAILTY, TESTS, TIME, QMLE
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1503449
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