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

_IMF Working Papers, January 1, 2003_

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## Bibliographic details
- Authors: Iryna V. Ivaschenko
- Published: January 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451841923.001

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### Core proposition and summary findings
- Economic theory suggests that vulnerable financial conditions of the corporate sector can trigger or worsen an economy-wide recession.
- The paper proposes the Corporate Vulnerability Index (CVI) as a measure of corporate vulnerability.
- 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.

### CVI construction and methodology
- CVI definition: the default probability for the entire corporate sector.
- Underlying model: structural model of corporate debt by Anderson, Sundaresan, and Tychon (1996).
- Key technical terms preserved as used in the source: aggregate corporate bond yield datum, bond value, contract term, CVI construction, default probability, recovery rate, structural models of corporate debt, yield curve.

### Empirical results and predictive performance
- Predictive horizon: CVI predicts probability of recession 4 to 6 quarters ahead.
- Severity link: CVI increases are associated with higher probability of more severe and lengthy recession 3 to 6 quarters ahead.
- Estimation techniques referenced: probit, ordered probit.
- Controls: results hold even when controlling for other leading indicators.

### Policy-relevant implications and focus areas
- Corporate-sector financial vulnerability (as measured by CVI) is a useful leading indicator for macroeconomic risk assessment.
- Monitoring CVI could inform early-warning systems and macroprudential policy aimed at mitigating recession risk tied to corporate leverage and default probability.

### Publication and metadata
- Author: Iryna V. Ivaschenko
- Date: January 1, 2003
- Series: Working Paper No. 2003/003
- Issue: 003
- Volume: 2003
- Pages: 32
- DOI: https://doi.org/10.5089/9781451841923.001
- Stock No: WPIEA0032003
- ISBN: 9781451841923
- ISSN: 1018-5941
- Citation format shown on page: Iryna V. Ivaschenko "How Much Leverage is too Much, or Does Corporate Risk Determine the Severity of a Recession?", IMF Working Papers 2003, 003 (2003), accessed 9/9/2026, https://doi.org/10.5089/9781451841923.001

*IMF Working Paper — Iryna V. Ivaschenko, Working Paper No. 2003/003*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/how-much-leverage-is-too-much-or-does-corporate-risk-determine-the-severity-of-a-recession-16256_