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Credit Cycles and Macro Fundamentals

Author

Listed:
  • Siem Jan Koopman

    () (Vrije Universiteit Amsterdam)

  • Roman Kraeussl

    (Vrije Universiteit Amsterdam)

  • Andre Lucas

    () (Vrije Universiteit Amsterdam)

  • Andre Monteiro

    () (Vrije Universiteit Amsterdam)

Abstract

This discussion paper resulted in an article in the Journal of Empirical Finance (2009). Vol. 16, issue 1, pages 42-54. We study the relation between the credit cycle and macro-economic fundamentals in an intensity-based framework. Using rating transition and default data of U.S. corporates from Standard and Poor’s over the period 1980—2005 we directly estimate the credit cycle from the micro rating data. We relate this cycle to the business cycle, bank lending conditions, and financial market variables. In line with earlier studies, these variables appear to explain part of the credit cycle. As our main contribution, we test for the correct dynamic specification of these models. In all cases, the hypothesis of correct dynamic specification is strongly rejected. Moreover, if we account for the dynamic mis-specification, many of the variables thought to explain the credit cycle, turn out to be insignificant. The main exceptions are GDP growth, and to some extent stock returns and stock return volatilities. Their economic significance appears low, however. This raises the puzzle of which macro-economic fundamentals explain default and rating dynamics.

Suggested Citation

  • Siem Jan Koopman & Roman Kraeussl & Andre Lucas & Andre Monteiro, 2006. "Credit Cycles and Macro Fundamentals," Tinbergen Institute Discussion Papers 06-023/2, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20060023
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    References listed on IDEAS

    as
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    3. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
    4. Kräussl, Roman, 2000. "Sovereign credit ratings and their impact on recent financial crises," CFS Working Paper Series 2000/04, Center for Financial Studies (CFS).
    5. André Lucas & Siem Jan Koopman, 2005. "Business and default cycles for credit risk," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 311-323.
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    8. Koopman, Siem Jan & Lucas, Andre & Monteiro, Andre, 2008. "The multi-state latent factor intensity model for credit rating transitions," Journal of Econometrics, Elsevier, vol. 142(1), pages 399-424, January.
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    More about this item

    Keywords

    Credit cycles; Business cycles; Bank lending conditions; Unobserved component models; Intensity models;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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