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Koopman, S., Lucas, A., and Schwaab, B. (2012). Dynamic factor models with macro, frailty and industry effects for U.S. default counts: The credit crisis of 2008. Journal of Business and Economic Statistics, 30(4):521-532.

  • Journal
    Journal of Business and Economic Statistics

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.