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Macroeconomic variables and default risk: an application of the FAVAR model

Author

Listed:
  • Liang Guo
  • Catherine Bruneau

Abstract

This paper studies the influence of macroeconomic factors on credit risk. We apply the dynamic factor model (FAVAR type) proposed by Stock and Watson [2005]. We have two empirical applications, respectively in the United States and in the Euro area. In the two applications, the results suggest that the most important factor for explaining default rates is related to real activity. Furthermore, we are interested in the effect of monetary policy on default rates. The results suggest that default rates increase slightly after a rise in the interest rate and that speculative grade firms are more sensitive. However, the contribution of interest rate shocks to default rates is limited.

Suggested Citation

  • Liang Guo & Catherine Bruneau, 2014. "Macroeconomic variables and default risk: an application of the FAVAR model," Revue d'économie politique, Dalloz, vol. 124(5), pages 817-857.
    • Handle: RePEc:cai:repdal:redp_245_0817
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