Unobserved Heterogeneity and the Term-Structure of Default

Abstract

This paper estimates the conditional hazard baseline (term-structure) of the hazard rate to default at the time of bonds’ issuance by using two hazard models–one ignoring and another allowing unobserved heterogeneity (UH) in the hazard rate. Following Diamond (1989) one can predict a declining hazard rate to default due to adverse selection and moral hazard. After controlling for UH caused by adverse selection and time-series shocks, the hazard rate shows to be increasing over time and hence the moral hazard effect cannot be confirmed.

Citation

Galil, K. (2007), "Unobserved Heterogeneity and the Term-Structure of Default", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Issues in Corporate Governance and Finance (Advances in Financial Economics, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 311-344. https://doi.org/10.1016/S1569-3732(07)12012-0