Discussion Paper Series 2006-E-7

Competing Risk Analysis of Japan's Small Financial Institutions

Xinghua Yu

This paper develops a dependent competing risks model to investigate the determinants of time to bankruptcy and time to merger jointly, and more importantly, to investigate their interdependence. This paper identifies strong interdependence between the bankruptcy and merger hazards, both through the correlation of the unobserved heterogeneities and through the preventive behavior of the individual firms. This paper shows that the common practice of assuming the independence of the competing risks would yield biased estimates and lower the predictive accuracy. In addition, this paper addresses important econometric-theoretic questions that arise with the empirical analysis, namely, identification and testing a hypothesis in a nonstandard situation.

Keywords: Competing Risks Duration Models, Identification, Maximum Likelihood Estimator, Bankruptcy and Merger, Credit Cooperatives in Japan

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2006 Bank of Japan All Rights Reserved.

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