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

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  • Siem Jan Koopman
  • André Lucas
  • Bernd Schwaab

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.

Suggested Citation

  • Siem Jan Koopman & André Lucas & Bernd Schwaab, 2012. "Dynamic Factor Models With Macro, Frailty, and Industry Effects for U.S. Default Counts: The Credit Crisis of 2008," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(4), pages 521-532, May.
    • Handle: RePEc:taf:jnlbes:v:30:y:2012:i:4:p:521-532
    DOI: 10.1080/07350015.2012.700859
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    1. Duffie, Darrell & Saita, Leandro & Wang, Ke, 2007. "Multi-period corporate default prediction with stochastic covariates," Journal of Financial Economics, Elsevier, vol. 83(3), pages 635-665, March.
    2. Darrell Duffie & Andreas Eckner & Guillaume Horel & Leandro Saita, 2009. "Frailty Correlated Default," Journal of Finance, American Finance Association, vol. 64(5), pages 2089-2123, October.
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    More about this item

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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