Modeling the Effect of Macroeconomic Factors on Corporate Default and Credit Rating Transitions
by Stephen Figlewski of New York University,
March 29, 2008
Abstract: In credit modeling, default intensity is known to depend on firm-specific factors, notably credit rating, but variation in aggregate default rates over time presumably reflects changes in general economic conditions also. We fit Cox intensity models for defaults, as well as major upgrades and downgrades in credit rating, with both firm-specific factors and a broad range of macroeconomic variables. The sample covers all corporate issuers in Moody's corporate bond Default Research Database over the period 1981 - 2002. We find credit events are strongly influenced by ratings related factors, and also significantly affected by macroeconomic factors. Interestingly, while the coefficients on specific macro variables vary widely depending on which other variables are included in a specification, the estimated effects of the ratings-related factors are largely unchanged by the addition of macroeconomic variables to the model.
Keywords: credit risk, default intensity, Cox model.