Interdependencies between Expected Default Frequency and the Macro Economy
AbstractWe use a vector error-correction model to study interdependencies between the aggregate expected default frequency (EDF) and the macroeconomic development. The model is used to forecast the median EDF. Evaluations of the model show that it yields low forecast errors and that the interest rate has the strongest impact on expected default frequency. Forecasts indicate that a lower short-term interest rate reduces the EDF and, in turn, risk premiums. This reduces the marginal cost for corporate investments and household consumption and stimulates growth through these two components of aggregate demand. At the same time, it imposes a downward pressure on the product prices of firms and thereby on inflation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by International Journal of Central Banking in its journal International Journal of Central Banking.
Volume (Year): 5 (2009)
Issue (Month): 3 (September)
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Pesaran, M.H. & Schuermann, T. & Treutler, B-J. & Weiner, S.M., 2003.
"Macroeconomic Dynamics and Credit Risk: A Global Perspective,"
Cambridge Working Papers in Economics
0330, Faculty of Economics, University of Cambridge.
- Pesaran, M. Hashem & Schuermann, Til & Treutler, Bjorn-Jakob & Weiner, Scott M., 2006. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1211-1261, August.
- Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & M. Hashem Pesaran, 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," CESifo Working Paper Series 995, CESifo Group Munich.
- M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler & Scott M. Weiner & April, . "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Center for Financial Institutions Working Papers 03-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2005.
"Exploring interactions between real activity and the financial stance,"
Journal of Financial Stability,
Elsevier, vol. 1(3), pages 308-341, April.
- Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2005. "Exploring Interactions between Real Activity and the Financial Stance," Working Paper Series 184, Sveriges Riksbank (Central Bank of Sweden).
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Jorge A. Chan-Lau, 2006. "Fundamentals-Based Estimation of Default Probabilities: A Survey," IMF Working Papers 06/149, International Monetary Fund.
- Bruneau, C. & de Bandt, O. & El Amri, W., 2012. "Macroeconomic fluctuations and corporate financial fragility," Journal of Financial Stability, Elsevier, vol. 8(4), pages 219-235.
- Martín Saldías, 2011.
"A Market-based Approach to Sector Risk Determinants and Transmission in the Euro Area,"
w201130, Banco de Portugal, Economics and Research Department.
- Saldías, Martín, 2013. "A market-based approach to sector risk determinants and transmission in the euro area," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4534-4555.
- Saldías, Martín, 2013. "A market-based approach to sector risk determinants and transmission in the euro area," Working Paper Series 1574, European Central Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).
If references are entirely missing, you can add them using this form.