McAnulty College and Graduate School of Liberal Arts
Bankruptcy, catastrophic, cusp, logistic, Portfolio, regression
This paper uses logistic regression to assign risk of catastrophic loss (defined as a loss of 80% or more of market cap value) to companies, and analyzes the subsequent returns of high risk and low risk portfolios. In the final model, the low risk portfolio had a three-year mean return of approximately 47%, with a catastrophic loss rate of 1.1%. The high-risk portfolio had a three-year mean return of approximately .5%, with a catastrophic loss rate of 29%. The paper expands upon a model developed by Dr. Abhay Gaur and Dr. Leo Rebholz in Rebholz’s 2002 thesis, Bankruptcy as Cusp Catastrophe. This paper first validates the model, introduces a new variable, which examines financial momentum, and transforms the bankruptcy variable to catastrophic loss. The success of the model was viewed through a comparative approach of high and low risk portfolios.
McKibben, M. (2017). Predicting Bankruptcy and Catastrophic Loss: A Portfolio Approach (Master's thesis, Duquesne University). Retrieved from https://dsc.duq.edu/etd/140