How Much Leverage is too Much, or Does Corporate Risk Determine the Severity of a Recession?

January 1, 2003

Preview Citation

Format: Chicago

Iryna V. Ivaschenko How Much Leverage is too Much, or Does Corporate Risk Determine the Severity of a Recession?, (USA: International Monetary Fund, 2003) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Economic theory suggests that vulnerable financial conditions of the corporate sector can trigger or worsen an economy-wide recession. This paper proposes a measure of corporate vulnerability, the Corporate Vulnerability Index (CVI) and analyses whether it can explain the probability and severity of recessions. The CVI is constructed as the default probability for the entire corporate sector, using the model of corporate debt by Anderson, Sundaresan, and Tychon (1996). The CVI is shown to be a significant predictor of the probability of a recession 4 to 6 quarters ahead, even controlling for other leading indicators. An increase in the CVI is also associated with an increase in the probability of a more severe and lengthy recession 3 to 6 quarters ahead.

Subject: Bond yields, Corporate bonds, Financial institutions, Financial services, Financial statements, Public financial management (PFM), Stocks, Yield curve

Keywords: Aggregate corporate bond yield datum, Bond value, Bond yields, Contract term, Corporate bonds, CVI construction, Default probability, Financial statements, Forecasting, Global, Leverage, NBER recession index, North America, Ordered probit, Probability of recession, Probit, Ranking, Recession episode, Recovery rate, Severity of recession, Short interest, Stocks, Structural models of corporate debt, WP, Yield curve

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/003
Stock No:

WPIEA0032003
ISBN:

9781451841923
ISSN:

1018-5941

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