DEFAULT RISK: FROM A PERSPECTIVE OF MEASUREMENT ERRORS

Xiaolou Yang

Abstract


In this paper, we set up our default probability model to examine the determinants of corporate credit default by taking simultaneous consideration of both firm-specific characteristics as well as macroeconomic variables. The main effort of this study is to reexamine firm default risk from the perspective of measurement error by representing the first treatment of a wide class of nonlinear models with discrete variables using instruments. We found measurement error has great impact on the risk of default. In addition, this relation found to be crucially dependent on credit cycles and firm financial status.

JEL classification: G20, G21, G28.

Keywords: Measurement error, Default risk, Risk premium, Credit risk, Equity returns.


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References


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