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Predicting default rates by capturing critical transitions in the macroeconomic system

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  • Xing, Kai
  • Yang, Xiaoguang

Abstract

We employ a method of capturing critical transitions of macroeconomic system to predict corporate default. The method is originally developed for anticipating critical transitions in complex natural systems. Based on this method, we construct macro-indicators for capturing incipient changes in the macroeconomic system by using different sets of economic factors, and then we use these indicators to predict corporate default in the US industrial sector. Empirical results show that the indicator constructed by exclusively using leading factors outperforms the other indicators in terms of predicting power. This study implies that the method proposed in natural sciences can be extended efficiently to the field of economics, and it is not the interaction of more variables but the interaction of the leading variables to contain more important information.

Suggested Citation

  • Xing, Kai & Yang, Xiaoguang, 2020. "Predicting default rates by capturing critical transitions in the macroeconomic system," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318300357
    DOI: 10.1016/j.frl.2019.02.007
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    Cited by:

    1. Xing, Kai & Luo, Dan & Liu, Lanlan, 2023. "Macroeconomic conditions, corporate default, and default clustering," Economic Modelling, Elsevier, vol. 118(C).

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    More about this item

    Keywords

    Corporate default; Macro-indicator; Critical transitions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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