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Predicting default rates by capturing critical transitions in the macroeconomic system

Kai Xing and Xiaoguang Yang

Finance Research Letters, 2020, vol. 32, issue C

Abstract: We employ a method of capturing critical transitions of macroeconomic system to predict corporate default. The method is originally developed for anticipating critical transitions in complex natural systems. Based on this method, we construct macro-indicators for capturing incipient changes in the macroeconomic system by using different sets of economic factors, and then we use these indicators to predict corporate default in the US industrial sector. Empirical results show that the indicator constructed by exclusively using leading factors outperforms the other indicators in terms of predicting power. This study implies that the method proposed in natural sciences can be extended efficiently to the field of economics, and it is not the interaction of more variables but the interaction of the leading variables to contain more important information.

Keywords: Corporate default; Macro-indicator; Critical transitions (search for similar items in EconPapers)
JEL-codes: G01 G10 G33 E32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318300357

DOI: 10.1016/j.frl.2019.02.007

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