Journal of Credit Risk

Risk.net

The systematic and idiosyncratic modules of bankruptcy risk

Dror Parnes

ABSTRACT

Many studies have explored the idiosyncratic and systematic factors of bankruptcy, yet there is no agreement on the precise degree of these modules. This study reveals to what extent each module is responsible for, and how much they affect, default risk within different sectors. Inspired by numerous compartmental theories in epidemiology, a notional model is developed in this paper and is then examined over collected observations from 1995 to 2004. Various industries are collected into five groups based on their conceivable business encounters, allowing for the computation of the model parameters. The results demonstrate relatively low susceptibility to market conditions and relatively high susceptibility to idiosyncratic factors.

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