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Firm default probabilities revisited

Homero Gonçalves
Publication Year 
This article describes a tool to assess the creditworthiness of the Portuguese non-financial firms. In its design, the main goal is to find factors explaining the probability that any given firm will have a significant default episode vis-\`{a}-vis the banking system during the following year. Using information from the central credit register for period 2002--2015 and a comprehensive balance sheet data set for period 2005--2014, we develop a method to select explanatory variables and then estimate binary response models for ten strata of firms, defined in terms of size and sector of activity. We use this methodology for the classification of firms in terms of one-year probability of default consistent with typical values of existing credit rating systems, in particular the one used within the Eurosystem. We provide a brief characterisation of the Portuguese non-financial sector in terms of probabilities of default and transition between credit rating classes.
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