Beyond Macroeconomic Risk: The Role of Contagion in the Italian Corporate Default Correlation

37 Pages Posted: 8 May 2010

Date Written: June 30, 2009

Abstract

The paper investigates the extent to which Italian corporate default correlation is due to the common dependence on macroeconomic (systematic) risk factors or, else, to other possibly unobservable factors arising from business inter-connections. Data on corporate default frequencies are taken from the Central Credit Register’s archive at industry level over the period March 1991 - March 2008. A system of equations is estimated to relate eight classes of industry-specific default rates to macroeconomic risk factors. We find that seven latent systematic factors summarizing macroeconomic conditions have a large impact on corporate default risk, but the residual correlation between the error terms of the estimated model’s equations suggests sectoral interdependence that might give rise to micro-contagion across sectors. Once contagion is identified, the model for corporate default rates is re-estimated using the leading macroeconomic variables and the latent contagion factors as explanatory variables in order to derive economic implications for macro-prudential analysis.

Keywords: Credit risk, common latent factors, systemic risk, contagion

JEL Classification: C32, E44, G21

Suggested Citation

Foglia, Antonella and Fiori, Roberta and iannotti, simonetta, Beyond Macroeconomic Risk: The Role of Contagion in the Italian Corporate Default Correlation (June 30, 2009). CAREFIN Research Paper No. 12/09, Available at SSRN: https://ssrn.com/abstract=1600214

Antonella Foglia (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberta Fiori

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Simonetta Iannotti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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