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

Siem Jan Koopman, Andre Lucas and Bernd Schwaab

Journal of Business & Economic Statistics, 2012, vol. 30, issue 4, 521-532

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.

Date: 2012
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Working Paper: Dynamic factor models with macro, frailty and industry effects for US default counts: the credit crisis of 2008 (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:30:y:2012:i:4:p:521-532

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DOI: 10.1080/07350015.2012.700859

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