Comparing Australian and US Corporate Default Risk Using Quantile Regression

Allen, David E.; Kramadibrata, Akhmad R; Powell, Robert; Singh, Abhay Kumar

doi:10.2139/ssrn.1965284

Cited by 4 publications

(2 citation statements)

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“…Furthermore, as (Godley 2019) 7 shows, the desire to maintain a government budget surplus will involve the private sector accumulating debt, which may naturally become unsustainable, because the private sector, unlike monetarily sovereign governments, cannot necessarily meet all its liabilities as they fall due (Greenspan 2011) 8 .…”

Section: Government Surplus = Non-government Deficitmentioning

confidence: 99%

Deficits, Crowding Out and Inflation in Monetarily Sovereign Nations

Dubey

2023

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Government deficits are often viewed negatively by mainstream economic theory. They are believed to lead to higher interest rates, inflation, and crowding out of private investment. This paper aims to evaluate the validity of these conventional beliefs about deficits. To do so, a Modern Monetary Theory and Keynesian theoretical framework have been used. These theories have then been analysed in the context of empirical data from the United States and Japan over the last three decades. I find that deficits have not directly led to higher interest rates, crowding out or inflation in these two nations. The findings emphasise the importance for monetarily sovereign governments to prioritise addressing socio-economic issues faced by citizens rather than being overly concerned about deficits on their own. The findings also indicate the need for a more pluralistic approach to macroeconomic policy that involves considering various schools of thought - such as Modern Monetary Theory - apart from mainstream economics, that may offer a more suitable framework for understanding fiscal policy choices and their respective outcomes.

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Section: Government Surplus = Non-government Deficitmentioning

confidence: 99%

Deficits, Crowding Out and Inflation in Monetarily Sovereign Nations

Dubey

2023

Preprint

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“…However, dividing the dataset into parts reduces the number of observations examined in each segment, and Monte Carlo simulation is particularly useful in cases of lesser observations, as it enriches the dataset by expanding the observations used. This combination of Monte Carlo simulation and quantile regression is unique to the authors and has been used in other settings such as Asian bank risk and comparison of Australian default risk to the USA (Allen, Kramadibrata, Powell, & Singh, 2010, 2011a, 2011b, but its use in the comparison of emerging and speculative companies to established companies is a first.…”

Section: Introductionmentioning

confidence: 99%

A Quantile Analysis of Default Risk for Speculative and Emerging Companies

et al. 2011

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Using quantile regression, this article examines default risk of emerging and speculative companies in Australia and the United States as compared to established and investment entities. We use two datasets for each of the two countries, one speculative and one established. In the US we compare companies from the S&P 500 to those on the Speculative Grade Liquidity Ratings list (Moody's Investor Services, 2010). For Australia, we compare entities from the S&P/ASX 200 to those on the S&P/ASX Emerging Companies Index (EMCOX). We also divide the datasets into GFC and Pre-GFC periods to examine default risk over different economic circumstances. Quantile Regression splits the data into parts or quantiles, thus allowing default risk to be examined at different risk levels. This is especially useful in measuring extreme risk quantiles, when corporate failures are most likely. We apply Monte Carlo simulation to asset returns to calculate Distance to Default using a Merton structural credit model approach. In both countries, the analysis finds substantially higher default risk for speculative as compared to established companies. The spread between speculative company and established company default risk is found to remain constant in Australia through different economic circumstances, but to increase in the US during the GFC as compared to pre-GFC. These findings are important to lenders in understanding, and providing for, default risk for companies of different grades through varying economic cycles.

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