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A Model on Credit Analysis: Combining a First Passage Model and Survival Analysis for Corporate Default

In this paper, we offer a new set of credit analysis models combining two traditional approaches of corporate default prediction: the survival analysis approach and the structural model approach. We first derive a modified version of the Black and Cox (1976) first passage model (a structural model) and estimate its model parameters based on the Miyake and Inoue (2009) method originally applied to parameter estimation for the Merton (1974) model (another structural model). And then based on the previous literature and various statistical techniques, we select some significant factors affecting corporate default and construct various survival analysis regression models with those factors including or excluding our first passage model as an independent variable. And by comparing our new combined models (the survival analysis regression models including the first passage model as an independent variable) with their corresponding plain models (the survival analysis regression models excluding the first passage model as an independent variable), we conclude that our new combined models are superior to their counterparts. And finally, by comparing those superior models, we propose a single best-fitting combined model for corporate default: an accelerated failure time model by Kalbfleisch and Prentice (1980) under the Weibull distribution with our modified Black and Cox (1976) model as an independent variable.