I will need an example of how the vector model works with some current statistics plugged into the mathmatical model incorporated in this paper

i need an example of the vector model incorporated into muy paper with current statistics plugged into it

THE PROBABILITY OF A BUSINESS FAILING IN THIS ECONOMY

A situation under which a company or any other business stops operations because of its inability to generate adequate revenue to make for its expenses is called Business failure. For instance, in case a company is not able to pay off its debt, it may file its case for bankruptcy and thereafter cease operating. Generally, business failures happen in the first year of its operations because the owner of the business is not capable of competing for various other reasons.

Inspite of the size and nature of operation any business today, an important threat of almost all the businesses is insolvency. The evidences present show that the rate of business failure has become high particularly in the last two decades. It is also interesting to note that during the 1980’s certain sectors of the UK economy, such as small industrial businesses in depressed areas, experienced failure rates as high as 50% over a five-year period. There are many studies in the economic literature which focuses on the explanation of relationship in between the fluctuations which takes place in all the measures of economic activities and the Business Failures. The empirical studies have time and again researched that their exists a correlation between the repeated variations in business failures and the fluctuations in macroeconomic aggregates. The macroeconomic conditions of any country can have an effect on the health of the businesses of the corporate sector. An increase in the interest rate which is current in effect in any country and a strict monetary policy can change the cost of borrowing for companies in a great way, deteriorate the financial position of any company very badly, as a result of which the corporate sector gets destabilized. In case of a change in the level of inflation, the volatility of cash flows gets affected and at the same time, if there is higher inflation, the firm’s ability to pay back the interests gets reduced. The result of the changes in the inflation rate is that the risk of financial distress increases thereby threatening the existence of many firms. Many valuable investment opportunities will be missed by the companies if there is a restriction on forwarding of credit to the companies arising out of credit rationing. The firms face many difficulties in raising the external finance to fund their working capital requirements to maintain the operations ongoing, specifically when the companies are in financial difficulties. Although these firms can be economically feasible in the long run but they are unable to protect their selves from going bankrupt in the short run, leading to a higher probability of corporate failures. The general economic conditions of any country can also be directly related to the company’s survival in that country. Economic recession narrows the gap in between the cash flow and service of debt in general and thereby creates financial distress in the country. With the coming of recession, the system gets strained, as it reduces the flow of income to meet the country’s current liabilities and increases the uncertainty of the liquidity needs of the future. In case a company is highly reactive to the ups and downs of the current global economic scenario, then the shareholders and lenders should identify a much greater risk of liquidation and financial distress in the company and should therefore ask for higher return as compensation. This increase in the investment costs inevitably reduces net cash flows, which becomes critical to the firm’s continuance, particularly for the firms that have to service high levels of debt finance. Taking into consideration, the social welfare and the macroeconomic consequences of corporate failures, it is very important to understand what drives corporate liquidations, and how business failures are associated with macroeconomic fluctuations. The objective of the present article is to expand the framework of the existing work by examining the potential links between business failures and fluctuations in macroeconomic aggregates by using vector error-correction model (VECM), which states the dynamic responses of business failures to the innovations to macroeconomic aggregates, accounting for the interactions between business failures and real/financial variables in the economy and assessing the short-run inter temporal co-movements between the variables and their long run equilibrium relationship.

The probability of failing of a business in any economy can be calculated by the following techniques

The VECM model:

The auto regression policy of vector is used to study the dynamics of the business failure which happens as a result of the policy shock and to analyze the correlation between the methodology of macroeconomic variables of interest and business failures. A general VAR model is as follows:

In the above model, y is an n -element vector of business failures and macroeconomic time series, Π and Γ are n n × matrices of unknown constants, and εt , the serially uncorrelated disturbance, has the multivariate distribution N(0, Iσ 2 ).

As already known, most of the economic series are non-stationary, even though in the long run they are likely to be co-integrated, a VAR that has a co-integration specification restricts the long run convergence of the endogenous variables to their co-integrating relationships while allowing a wide range of short-run dynamics. We can think of each of the co-integrating vectors as characterizing a long-run equilibrium involving y, with the convention that its numerical value is the ‘equilibrium error’ or ‘disequilibrium’, if we let zt−1 ≡ β ‘ yt−1 denote the n-vector of the last period’s equilibrium errors. Thus, equation (1) can be rewritten in the form

In the above model, the parameters α and Γ can be estimated using ordinary least squares. Equation (2) is what is known as a vector error-correction model. According to this model, the total change in y can be decomposed into a response to the last period’s disequilibrium, a moving average of past changes and a white noise. On condition that the error-correction term is non-zero, the deviation from the long-run equilibrium is corrected gradually through a series of partial short-run adjustments until ‘ 0 1 = t− β y. As because a shock to one variable directly affects the variable itself, and it also gets transmitted to all of the endogenous variables, therefore, VECM can be readily changed to construe the development of business failures as a function of orthogonalised ‘innovations’ in the macroeconomic variables, and break down the dynamics of business failures in terms of the relative contribution of underlying endogenous shocks and their transmission effects

The above study has taken into account whether aggregates of the macroeconomic dynamics can provide an explanation for the observed fluctuations of the business failures. Here, it is evident that most of the firms which are in distress are small and medium-sized firms (SMEs). As because macroeconomic factors are essential for the survival of marginal firms, the above study suggests that the policy reaction to the ‘credit rationing’ problem should be accommodating. An examination of national policies is advised to focus on improving the business climate in the economy, in which the new firms are encouraged to start and develop. It is suggested that the important role of financial distress in the economic fluctuations and in the propagation of recessions deserves further attention.

References

Business Failures and Macroeconomic Factors in the UK, retrieved from

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CDMQFjAA&url=http%3A%2F%2Fwww.efmaefm.org%2Fefma2005%2Fpapers%2F153-liu_paper &ei=nXM4UbuuBpDrrQfDrYC4CQ&usg=AFQjCNE8uNLl-UbRNc2iffjhp9yUSpMP3w&sig2=v-nVgkD5R5Bv_ppkc22XXg&bvm=bv.43287494,d.bmk

Predicting Corporate Failure: Empirical Evidence for the UK, retrieved from

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&ved=0CEoQFjAC&url=http%3A%2F%2Feprints.soton.ac.uk%2F36125%2F01%2F01-173 &ei=9Hc4Ua6RJIb3rQfkioDQAg&usg=AFQjCNG8peV4MBlijU80uDTz0H7JBUqrFQ&sig2=-DjGx5NTAvkdg9YVxFVn-A

http://financial-dictionary.thefreedictionary.com/Business+Failure