UCLA

Albeit rare, bankruptcies of publicly-traded firms can dilapidate the net worth of equity investors and potentially trigger additional corporate failures. In this study, we utilize a two-dimensional abstract asset allocation space to model bankruptcies of publicly-traded firms as purely spatial and as spatial-temporal point processes. By modeling the data through an epidemic type aftershock sequence model, we show that a bankruptcy can potentially help trigger another one that is as "far'' as twenty months apart from it. Our analysis provides insights into the temporal triggering function associated with these unusual events, and sheds light onto their productivity. This study may contribute to the development of regulatory policies that safeguard the economy against contagion effects in equity markets; the spatial-temporal model employed here, moreover, also yields implications for investment strategies.