Working Paper presents research work by both Danmarks Nationalbank’s employees and our partners. The series is primarily targeted at professionals and people with an interest in central banking research as well as economics and finance in a broader sense.
Working Paper: Can machine learning models capture correlations in corporate distresses?
We implement a regularly top-performing machine learning model and find that the added complexity in the model does not imply that the model is better at capturing correlation in corporate distresses compared to traditional distress models. Instead, we propose a frailty model, which allows for correlations in distresses. This model demonstrates competitive performance in terms of ranking firms by their riskiness, while providing accurate risk measures of a corporate loan portfolio.