Are hazard models superior to traditional bankruptcy prediction approaches? A comprehensive testJulian Bauer and Vineet Agarwal Journal of Banking & Finance, 2014, vol. 40, issue C, 432-442 Abstract: In recent years hazard models, using both market and accounting information, have become state of the art in predicting firm bankruptcies. However, a comprehensive test comparing their performance against the traditional accounting-based approach or the contingent claims approach is missing in the literature. Using a complete database of UK Main listed firms between 1979 and 2009, our Receiver Operating Characteristics (ROC) curve analysis shows that the hazard models are superior to the alternatives. Further, our information content tests demonstrate that the hazard models subsume all bankruptcy related information in the Taffler (1983)z-score model as well as in Bharath and Shumway (2008) contingent claims-based model. Finally, using a mixed regime competitive loan market with different costs of misclassification, the economic benefit of using the Shumway (2001) hazard model is clear, particularly when the performance is judged with return on risk weighted assets computed under Basel III. Keywords: Distress risk; Credit risk; Option pricing; Hazard models; Basel III (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:40:y:2014:i:c:p:432-442 DOI: 10.1016/j.jbankfin.2013.12.013 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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