We provide maximum likelihood estimators of term structures of
conditional probabilities of corporate default, incorporating the dynamics
of firm-specific and macroeconomic covariates. For U.S. Industrial
firms, based on over 390,000 firm-months of data spanning
1979 to 2004, the level and shape of the estimated term structure of
conditional future default probabilities depends on a firm's distance to
default (a volatility-adjusted measure of leverage), on the firm's trailing
stock return, on trailing S & P 500 returns, and on U.S. interest
rates, among other covariates. Variation in a firm's distance to default
has a substantially greater effect on the term structure of future
default hazard rates than does a comparatively significant change in
any of the other covariates. Default intensities are estimated to be
lower with higher short-term interest rates. The out-of-sample predictive
performance of the model is an improvement over that of other
available models.
|