DP7083 Firm Default and Aggregate Fluctuations

Author(s): Tor Jacobson , Rikard Kindell , Jesper Lindé , Kasper F. Roszbach

Publication Date: December 2008

Keyword(s): Business cycles , Default , Default-risk model , Logit model , Macroeconomic variables , Micro-data

JEL(s): C35 , C41 , C52 , E44 , G21 , G33

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7083.asp.asp

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.