UC Davis Agricultural and Resource Economics

Jens Hilscher and Mungo Wilson Propose a New Measure of Systematic Credit Risk

Nov. 21, 2016

The study shows that a straightforward and easy-to-implement and interpret measure of default probability contains significantly more information about future default and failure than S&P corporate credit ratings. The authors propose a new measure of systematic credit risk, the tendency for firms to default in bad times, just when the marginal investor is least able to absorb losses. They provide a theoretical justification for the measure, which they call failure beta, and show that ratings contain information about systematic default risk, which is also reflected in credit default swap (CDS) spreads.

Hilscher, J. and Wilson, M. Credit Ratings and Credit Risk: Is One Measure Enough? Management Science, Articles in Advance: 1-25.

 

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