Abstract/Summary

This study investigates how, and to what extent, macroeconomic conditions interact with corporate default in the US industrial sector from 1980 to 2014. Using an extensive data set of macro-level and micro-level variables, we construct five categories of indicators and measure macroeconomic conditions by investigating the comovements within each category of indicator. We find macroeconomic conditions have bidirectional causal interaction with corporate defaults across different economic regimes, reflecting the existence of feedback causality. Moreover, we show that macroeconomic indicator constructed using the least absolute shrinkage and selection operator (LASSO) approach shows superior explanatory power as well as predictive power for default clustering, indicating that movements of these indicators cause correlated changes in firms’ default rates. Overall, our study provides support for literature on default probability estimation from a macroeconomic perspective.