Corporate Default Risk in the Long-Run: Evidence from Switzerland, 1883-2015

The importance of properly managing and quantifying corporate default risk, and more generally credit risk cannot be understated as the great majority of the risk faced by banks and large financial institutions comes in the form of credit risk exposures. Understanding the determinants of bankruptcy rates over time and in the cross-section is of first-order importance for regulators and policy makers that are concerned about the well-functioning of the financial system, and ultimately economic growth. Our research project proposes to make use of recently digitalized publications made available by the Swiss Official Gazette of Commerce to construct default rate indices based on all corporate bankruptcy events in Switzerland over the 130+ year period spanning 1883 to 2015. The detail of the information contained in the Official Gazette gives us the unique opportunity to explore several research questions on credit risk. From a modeling point of view, the dataset allows in-sample and truly out-of-sample tests on statistical models for the probability of default. Moreover, the complete coverage of the data makes it possible to construct disaggregated figures along several dimensions such as location, industry, leverage, and size. Thus, it enables us to contrast the drivers of bankruptcy rates for large companies versus SMEs, and to evaluate the effect of political reforms that take place in different cantons on corporate defaults. The data is also particularly suited to study issues related to contagion and default correlations, and thus to measure the social cost of corporate defaults.