The Analytics of Risk Model Validation

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Determinants of small business default*

Sumit Agarwal^†; Souphala Chomsisengphet^‡; Chunlin Liu^¶† Federal Reserve Bank of Chicago, Chicago, IL^‡ Office of the Comptroller of the Currency, Washington, DC^¶ College of Business Administration, University of Nevada, Reno, NV

Abstract

In this paper, we empirically validate the importance of owner and business credit risk characteristics in determining default behaviour of more than 31 000 small business loans by type and size. Our results indicate that both owner- and firm-specific characteristics are important predictors of overall small business default. However, owner characteristics are more important determinants of small business loans but not small business lines. We also differentiate between small ...