Modeling the Effect of Macroeconomic Factors on Corporate Default and Credit Rating Transitions

NYU Stern Finance Working Paper No. FIN-06-007

55 Pages Posted: 3 Oct 2006

See all articles by Stephen Figlewski

Stephen Figlewski

New York University - Stern School of Business

Halina Frydman

New York University (NYU) - Department of Information, Operations, and Management Sciences

Weijian Liang

NYU Stern School of Business

Date Written: September 5, 2006

Abstract

In the reduced-form approach to credit modeling, default frequency has been found to depend on several firm-specific factors, most notably credit rating. But aggregate default rates also vary substantially over time, presumably reflecting changes in general economic conditions. In this paper, we fit Cox intensity models for major credit events, including defaults as well as major upgrades and downgrades in credit rating. The sample covers all corporate issuers in Moody's corporate bond Default Research Database over the period 1981-2002. The models incorporate both firm-specific factors related to a firm's credit rating history and a broad range of macroeconomic variables. Our results show that intensities of occurrence of credit events are significantly influenced by macro factors.

Keywords: credit risk, default intensity, Cox model

JEL Classification: G33, G32, E44, G12

Suggested Citation

Figlewski, Stephen and Frydman, Halina and Liang, Weijian, Modeling the Effect of Macroeconomic Factors on Corporate Default and Credit Rating Transitions (September 5, 2006). NYU Stern Finance Working Paper No. FIN-06-007, Available at SSRN: https://ssrn.com/abstract=934438 or http://dx.doi.org/10.2139/ssrn.934438

Stephen Figlewski (Contact Author)

New York University - Stern School of Business ( email )

44 West 4th Street
Department of Finance Suite 9-160
New York, NY 10012-1126
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212-998-0712 (Phone)
212-995-4220 (Fax)

Halina Frydman

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0453 (Phone)

Weijian Liang

NYU Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
212-998-0492 (Phone)

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