Bottom-Up Leading Macroeconomic Indicators: An Application to Non-Financial Corporate Defaults Using Machine Learning
40 Pages Posted: 22 Oct 2019
Date Written: September, 2019
This paper constructs a leading macroeconomic indicator from microeconomic data using recent machine learning techniques. Using tree-based methods, we estimate probabilities of default for publicly traded non-financial firms in the United States. We then use the cross-section of out-of-sample predicted default probabilities to construct a leading indicator of non-financial corporate health. The index predicts real economic outcomes such as GDP growth and employment up to eight quarters ahead. Impulse responses validate the interpretation of the index as a measure of financial stress.
JEL Classification: C53, E32, G33
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