Firm Default and Aggregate Fluctuations

52 Pages Posted: 22 Sep 2011

See all articles by Jesper Lindé

Jesper Lindé

Sveriges Riksbank - Research Division

Tor Jacobson

Sveriges Riksbank - Research Division

Multiple version iconThere are 5 versions of this paper

Date Written: July 20, 2011

Abstract

This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation 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

Suggested Citation

Linde, Jesper and Jacobson, Tor, Firm Default and Aggregate Fluctuations (July 20, 2011). FRB International Finance Discussion Paper No. 1029, Available at SSRN: https://ssrn.com/abstract=1931100 or http://dx.doi.org/10.2139/ssrn.1931100

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

Tor Jacobson

Sveriges Riksbank - Research Division ( email )

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

HOME PAGE: www.riksbank.com

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