Macroeconomic variables underlying synchronisation in probabilities of default of South African companies

M.Comm.This paper estimates the probability of default of South African companies and determines if the default probabilities are synchronized. It further investigates if a relationship exists between the macroeconomic variables and default probabilities. Eighty South African companies are analyzed for the period ranging from January 1997 to December 2010. The study uses the KMV (Kealhofer, Merton and Vasicek) model to estimate the probability of default while it uses the Dynamic Factor Model (DFM) to determine synchronization and to extract common factors that drive the probability of default. The results show that the estimated probability of default trend is able to depict events that impacted the South African economy, such as the Asian crisis, the dot com bubble and global financial crisis. The DFM reveals that South African companies’ probabilities are synchronized and they are to a certain degree driven by the economic environment. The dependency of defaults on macroeconomic variables and the high synchronization of companies has policy implications