Interdependencies between Expected Default Frequency and the Macro Economy
We 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.
References listed on IDEAS
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.:
- 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.
- 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.
- 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.
- 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).
- 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.
- 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.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Jorge A Chan-Lau, 2006. "Fundamentals-Based Estimation of Default Probabilities - A Survey," IMF Working Papers 06/149, International Monetary Fund.
- 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.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2009:q:3:a:3. See general information about how to correct material in RePEc.
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.