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Modeling the effect of macroeconomic factors on corporate default and credit rating transitions

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  • Figlewski, Stephen
  • Frydman, Halina
  • Liang, Weijian

Abstract

We explore how general economic conditions impact defaults and major credit rating changes by fitting reduced-form Cox intensity models with a broad range of macroeconomic and firm-specific ratings-related variables. For all corporate issuers in the period 1981–2002 we find both types of factors strongly influenced the risk of a credit event. However, while the effects of ratings-related factors were consistent with expectations and very robust under different specifications, significance levels and even signs for the macro variable coefficients depended heavily on which other variables were included. This sheds light on the disparate results reported in earlier studies.

Suggested Citation

  • Figlewski, Stephen & Frydman, Halina & Liang, Weijian, 2012. "Modeling the effect of macroeconomic factors on corporate default and credit rating transitions," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 87-105.
    • Handle: RePEc:eee:reveco:v:21:y:2012:i:1:p:87-105
    DOI: 10.1016/j.iref.2011.05.004
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    More about this item

    Keywords

    Credit risk; Cox model; Default risk; Intensity model; Bond ratings;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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