Topic: Default Risk Modelling Using Macroeconomic Variables

Speaker : Dr.Khusboo Agarwal

The abstract is given below :


Purpose :
This paper aims to find out significant macroeconomic variables (incorporated in the form of macroeconomic sensitivities) affecting the likelihood of default for a sample of listed Indian firms.

Design/methodology/approach :
The study uses a matched pair sample of defaulting and non-defaulting listed Indian firms. It employs two alternative statistical techniques viz. logistic regression and multiple discriminant analysis. The macroeconomic sensitivities are estimated by regressing the monthly stock return of the individual firm on the monthly changes in each macroeconomic variable.

Findings :
Sensitivity to changes in the stock market (stock market sensitivity) and sensitivity to changes in inflation (CPI sensitivity) have a significant impact on the default probability of a firm. Stock market sensitivity has a significant positive relationship with the probability of default and CPI sensitivity has a significant negative relationship with the probability of default.

Originality/value :
The study links the developments in the external environment to the firm’s susceptibility to default. Furthermore, it highlights the significance of sensitivity of a firm to uncertainties in the macroeconomic environment and its impact on default risk. This establishes the fact that each firm is uniquely affected by the changes in the overall macroeconomic environment. The findings could be valuable to lenders such as banks, financial institutions, investors and policy makers .

Keywords :
Financial distress, Default prediction, Macroeconomic factors, Logistic regression, Multiple discriminant analysis.

Paper type :
Research Paper