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Title:Credit cycles and macro fundamentals PDF Logo
Authors:Koopman, Siem Jan
Kräussl, Roman
Lucas, André
Issue Date:2006
Series/Report no.:CFS Working Paper 2006/33
Abstract:We study the relation between the credit cycle and macro economic fundamentals in an intensity based framework. Using rating transition and default data of U.S. corporates from Standard and Poor’s over the period 1980–2005 we directly estimate the credit cycle from the micro rating data. We relate this cycle to the business cycle, bank lending conditions, and financial market variables. In line with earlier studies, these variables appear to explain part of the credit cycle. As our main contribution, we test for the correct dynamic specification of these models. In all cases, the hypothesis of correct dynamic specification is strongly rejected. Moreover, accounting for dynamic mis-specification, many of the variables thought to explain the credit cycle, turn out to be insignificant. The main exceptions are GDP growth, and to some extent stock returns and stock return volatilities. Their economic significance appears low, however. This raises the puzzle of what macro-economic fundamentals explain default and rating dynamics
Subjects:Credit Cycles
Business Cycles
Bank Lending Conditions
Unobserved Component Models
Intensity Models
Monte Carlo Likelihood
JEL:G11
G21
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-38070
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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