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The Influence of Macroeconomic Factors on the Probability of Default

Lunds universitet/Nationalekonomiska institutionen
Publication Date
  • Probability Of Default
  • Distance To Default
  • Kmv
  • Panel Data Analysis
  • Macroeconomic Factors
  • Structural Models
  • Economics
  • Econometrics
  • Economic Theory
  • Economic Systems
  • Economic Policy
  • Nationalekonomi
  • Ekonometri
  • Ekonomisk Teori
  • Ekonomiska System
  • Ekonomisk Politik
  • Business And Economics
  • Economics


The purpose of this study is to quantitatively verify the relationship between corporate default probability and macroeconomic information. The purpose is further to compare the results of the panel data analysis for the firms from the Large Cap Index with the empirical findings generated by a similar model for the firms from the Mid & Small Cap Indexes. Also, the study aims to examine to which extend the current probability of default can be explained by an autoregressive model. This thesis presents the panel data analysis used for studying the relationship between default probability and macroeconomic factors in Sweden. Two separate panel models with cross-sectional fixed effects are estimated for two groups of Swedish non-financial firms – the Large Cap firms and the Mid & Small Cap firms, respectively. The regression models are constructed with respect to the delayed effect of macroeconomic information on the default probabilities. Distance to default is used as a dependent variable as closely related to the probability of default, since the variable of the probability of default possesses a variation not sufficient for the reliable regression analysis. The distances to default of the firms are calculated using the structural model similar to the Moody’s KMV™ approach. An autoregressive model with one-year lagged distance to default is also estimated. The panel regression results for the two groups of firms appear to be similar. It has been found that the one year lagged Industrial Production Index and the one year lagged SEK/EUR exchange rate exhibit a large negative effect on the probability of default. The interest rate and the one year lagged interest rate have been found to have a positive impact on the probability of default. The autoregressive model with an autoregressive term lagged once shows a decreasing distance to default over time.

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