Firm Default and Aggregate Fluctuations
45 Pages Posted: 17 Feb 2009
Date Written: December 2008
This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a multiperiod logit approach on a panel data set for all incorporated Swedish businesses over 1990-2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms' relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level.
Keywords: Business cycles, Default, Default-risk model, Logit model, Macroeconomic variables, Micro-data
JEL Classification: C35, C41, C52, E44, G21, G33
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