Dynamic Factor Models With Macro, Frailty and Industry Effects for U.S. Default Counts: The Credit Crisis of 2008

S.J. Koopman, A. Lucas, B. Schwaab

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

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. © 2012 American Statistical Association.
Original languageEnglish
Pages (from-to)521-532
JournalJournal of Business and Economic Statistics
Volume30
Issue number4
DOIs
Publication statusPublished - 2012

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