Dynamic Factor Models With Macro, Frailty, and Industry Effects for U.S. Default Counts: The Credit Crisis of 2008
We develop a high-dimensional, nonlinear, and non-Gaussian dynamic factor model for the decomposition of systematic default risk conditions into latent components for (1) macroeconomic/financial risk, (2) autonomous default dynamics (frailty), and (3) industry-specific effects. We analyze discrete U.S. corporate default counts together with macroeconomic and financial variables in one unifying framework. We find that approximately 35% of default rate variation is due to systematic and industry factors. Approximately one-third of this systematic variation is captured by the macroeconomic and financial factors. The remainder is captured by frailty (40%) and industry (25%) effects. The default-specific effects are particularly relevant before and during times of financial turbulence. We detect a build-up of systematic risk over the period preceding the 2008 credit crisis. This article has online supplementary material.
Year of publication: |
2012
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Authors: | Koopman, Siem Jan ; Lucas, André ; Schwaab, Bernd |
Published in: |
Journal of Business & Economic Statistics. - Taylor & Francis Journals, ISSN 0735-0015. - Vol. 30.2012, 4, p. 521-532
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Publisher: |
Taylor & Francis Journals |
Saved in:
Online Resource
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