Macro Economic Factors and Probability of Default

Abstract: Business cycles can have great impact on the profitability of individual firms. Therefore, they influence the risk profile of a given company or industry. This paper uses a multi factor fixed effect model to analyze the effect of certain macro economic factors on the probability of default on an industrial level. Monthly analysis is carried out using data of EDF (Expected Default Frequency) and other macro economic indicators from April 2000 to September 2005. The study verified the relationship between macroeconomic factors and the probability of default quantitatively.