Business Cycle and the Riskiness of Italian Firm: An Empirical Analysis

Abstract

Given the importance of the relationship between default rates and business cycles, we examine the ability of macroeconomic variables, explaining changes on the default rate of Italian companies. Via a VAR (vector autoregressive) model and an analysis of individual equations, we find a significant influence of short-term interest rates, and the growth rate of gross domestic product (GDP) in the euro area, on the default rate of Italian companies in the period 1985-2004. Using the selected macroeconomic variables, we build a credit cycle index (CCI) in order to infer the state of credit in the Italian market in future periods. The construction of this “credit cycle index” is based on a robust econometric structure with a minimum number of parameters and a minimum number of required data.