Firm Default and Aggregate Fluctuations

Sveriges Riksbank Research Paper Series No. 57

Sveriges Riksbank Working Paper Series No. 226

45 Pages Posted: 12 Oct 2009 Last revised: 7 Jul 2011

See all articles by Tor Jacobson

Tor Jacobson

Sveriges Riksbank - Research Division

Jesper Lindé

Sveriges Riksbank - Research Division

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business

Multiple version iconThere are 5 versions of this paper

Date Written: July 6, 2011

Abstract

This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms' relative riskiness,but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.

Keywords: default, default-risk model, business cycles, aggregate fluctuations, micro-data, logit, firm-specific variables, macroeconomic variables

JEL Classification: C35, C52, E44, G33

Suggested Citation

Jacobson, Tor and Linde, Jesper and Roszbach, Kasper F., Firm Default and Aggregate Fluctuations (July 6, 2011). Sveriges Riksbank Research Paper Series No. 57, Sveriges Riksbank Working Paper Series No. 226, Available at SSRN: https://ssrn.com/abstract=1471254 or http://dx.doi.org/10.2139/ssrn.1471254

Tor Jacobson

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0000 (Phone)

HOME PAGE: www.riksbank.com

Jesper Linde (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0873 (Phone)

HOME PAGE: http://www.riksbank.com

Kasper F. Roszbach

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

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