Times-to-Default : Life Cycle, Global and Industry Cycle Impacts

Revised version available under the title quot;Business and Financial Indicators: What are the Determinants of Default Probability Changes?quot;.This paper studies times-to-default of individual firms across risk classes. Using Standard amp; Poor's ratings database we investigate common drivers of default probabilities and address two shortcomings of many papers in the credit literature. First, we identify relevant determinants of default intensities using business cycle and credit market proxies in addition to financial markets indicators, and reveal the time-span of their impacts. We show that misspecifications of financial based factor models are largely corrected by non financial information. Second, we show that past economic conditions are of prime importance in explaining probability changes: current shocks and long term trends jointly determine default probabilities. Finally we exhibit industry contagion indicators which might be helpful to capture leading and persistency patterns of the default cycle