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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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    References listed on IDEAS

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    Cited by:

    1. Dimitris Gavalas & Theodore Syriopoulos, 2014. "Bank Credit Risk Management and Migration Analysis; Conditioning Transition Matrices on the Stage of the Business Cycle," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(2), pages 151-166, May.
    2. Kuo, Su-Wen & Huang, Chin-Sheng & Jhang, Guan-Cih, 2015. "Liquidity, delistings, and credit risk premium," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 78-89.
    3. Orth, Walter, 2013. "Multi-period credit default prediction with time-varying covariates," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 214-222.
    4. Miroslav Plasil & Tomas Konecny & Jakub Seidler & Petr Hlavac, 2015. "In the Quest of Measuring the Financial Cycle," Working Papers 2015/05, Czech National Bank, Research Department.
    5. Jones, Stewart & Johnstone, David & Wilson, Roy, 2015. "An empirical evaluation of the performance of binary classifiers in the prediction of credit ratings changes," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 72-85.
    6. Almeida, Fernanda Dantas & Divino, José Angelo, 2015. "Determinants of the banking spread in the Brazilian economy: The role of micro and macroeconomic factors," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 29-39.
    7. Lu, Yang-Cheng & Wei, Yu-Chen & Chang, Tsang-Yao, 2015. "The effects and applicability of financial media reports on corporate default ratings," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 69-87.
    8. repec:bap:journl:180101 is not listed on IDEAS
    9. repec:kap:iaecre:v:20:y:2014:i:2:p:151-166 is not listed on IDEAS
    10. Böninghausen, Benjamin & Köhler, Matthias, 2015. "Diversification and determinants of international credit portfolios: Evidence from German banks," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 57-75.
    11. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9407-1 is not listed on IDEAS
    12. Louis, Philippe & Van Laere, Elisabeth & Baesens, Bart, 2013. "Understanding and predicting bank rating transitions using optimal survival analysis models," Economics Letters, Elsevier, vol. 119(3), pages 280-283.
    13. Huong Dang, 2014. "How dimensions of national culture and institutional characteristics influence sovereign rating migration dynamics," ZenTra Working Papers in Transnational Studies 42 / 2014, ZenTra - Center for Transnational Studies.
    14. Saona, Paolo, 2016. "Intra- and extra-bank determinants of Latin American Banks' profitability," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 197-214.
    15. Maltritz, Dominik & Molchanov, Alexander, 2014. "Country credit risk determinants with model uncertainty," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 224-234.
    16. Byoun, Soku, 2014. "Information content of unsolicited credit ratings and incentives of rating agencies: A theory," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 338-349.
    17. Amendola, Alessandra & Restaino, Marialuisa & Sensini, Luca, 2015. "An analysis of the determinants of financial distress in Italy: A competing risks approach," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 33-41.

    More about this item

    Keywords

    Credit risk; Cox model; Default risk; Intensity model; Bond ratings;

    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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