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Default risk modelling using macroeconomic variables

Khushbu Agrawal (International Management Institute Kolkata, Kolkata, India)
Yogesh Maheshwari (Indian Institute of Management Indore, Indore, India)

Journal of Indian Business Research

ISSN: 1755-4195

Article publication date: 11 November 2014




This paper aims to find out significant macroeconomic variables, incorporated as sensitivity variables (macroeconomic sensitivities), affecting financial distress for a sample of listed Indian firms.


The study uses a matched pair sample of defaulting and non-defaulting listed Indian firms. It uses 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.


Sensitivity to changes in the stock market (stock market sensitivity) and sensitivity to changes in inflation [Consumer Price Index (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.


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 and financial institutions, investors and policymakers.



Agrawal, K. and Maheshwari, Y. (2014), "Default risk modelling using macroeconomic variables", Journal of Indian Business Research, Vol. 6 No. 4, pp. 270-285.



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