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:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7083

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.