Dynamic Forecasts of Financial Distress of Australian Firms

Posted: 11 Mar 2015

See all articles by Maria Kim

Maria Kim

University of Wollongong

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Date Written: February 1, 2015

Abstract

Dynamic forecasts of financial distress have received far less attention than static forecasts, particularly in Australia. This study, therefore, investigates dynamic probability forecasts for Australian firms. Novel features of the modelling are the use of time-varying variables in forecasts from a Cox model. Not only is this one of relatively few studies to apply dynamic variables in forecasting financial distress, but to the authors’ knowledge it is the first to provide forecasts of survival probabilities using the Cox model with time-varying variables. Forecast accuracy is evaluated using receiver operating characteristics curves and the Brier Score. It was found that the dynamic model had superior predictive power, in out-of-sample forecasts, to the traditional Cox model and to the logit model.

Keywords: Baseline hazard, dynamic forecasts, financial distress prediction, proportional hazard, survival analysis, time-varying Cox regression model

Suggested Citation

Kim, Maria and Partington, Graham, Dynamic Forecasts of Financial Distress of Australian Firms (February 1, 2015). Australian Journal of Management, Vol. 40, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=2575721

Maria Kim (Contact Author)

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia
+61 2 4221 4759 (Phone)
+61 2 4221 4297 (Fax)

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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