Corporate Defaults and Linkages to Macro-Financial Risk Factors

System credit risk is an important indicator of system weakness or strength both at the sector and national levels. This dissertation investigates the effects of economic disruptions on the stability of the U.S. corporate economy, as modeled by a select cross-section of sectors. Expected default frequency (EDF) data are used as a proxy for firm credit risk. The EDF is a forward-looking credit measure that quantifies the credit quality of a firm; the credit measure combines balance sheet information with asset volatility to assess firm value and financial health. This study uses EDF data to investigate the linkages between industry default profiles and selected macroeconomic factors. The aim is to trace risk transmission through the U.S. corporate sector. In the wake of studies conducted by Pesaran et al. (2006) and Castren et al. (2008), this examination uses a Global Vector Autoregressive Model to evaluate risk transmission between the macroeconomy and the selected U.S. economic sectors as well as risk transmitted across these sectors. Key findings show that sector-specific instabilities are contagious and can travel across the economy to other sectors producing significant effects and with varied lag lengths. Declines in consumer expenditure, aggregate demand and housing prices have important implications for the stability of the U.S. corporate sector.