Corporate Default and other Credit Events ; The Role of the Macroeconomy and Credit Rating History

In credit modeling, default intensity is known to depend on rating history-specific factors, notably credit rating, but variation in aggregate default rates over time presumably also reflects changes in general economic conditions. We fit Cox intensity models for defaults, as well as for major upgrades and downgrades in credit rating, with both rating history-specific factors and a broad range of macroeconomic variables. The sample covers all corporate issuers in Moody's corporate bond Default Research Database over the period 1981 2002. We find that intensity of occurrence of a credit event is strongly related to rating history-specific factors, and also macroeconomic factors. The default and downgrade transitions are much more affected by the variables measuring the direction of the economy (e.g., GDP growth) and financial conditions (e.g., the return on the Russell 2000 index) than by those related to general macroeconomic conditions (e.g., the unemployment rate). Interestingly, while some of the coefficients on macro variables depend heavily on which other variables are included in a specification, the estimated effects of the ratings-related factors are largely unchanged by the addition of macroeconomic variables to the model. JEL Classification: G32, E44, G24