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

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

by Stephen Figlewski of New York University,
Halina Frydman of New York University, and
Weijian Liang of New York University

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.

JEL Classification: G33, G32, E44, G12.

Keywords: credit risk, default intensity, Cox model.

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