What question did this study set out to answer?

This paper aims to explore how systematic risk exposure relates to the default probabilities of individual firms during the financial crisis.

June 3, 2026Open Access

The Change in Systematic Risk and the Default Probability of Individual Firms during the Financial Crisis

Puntos clave

This paper aims to explore how systematic risk exposure relates to the default probabilities of individual firms during the financial crisis.
Dynamic estimation of systematic risk using the Kalman Filter.
Calculation of Kalman Gain to measure changes in systematic risk over time.
Analysis of portfolios sorted by default probability for correlation with systematic risk.
Portfolios with higher default probabilities showed greater correlation with systematic risk.
An increase in Kalman Gain was positively correlated with the rise in default probabilities.
The findings support the notion that higher volatility leads to increased default likelihood.

Resumen

The aim of this paper is to provide preliminary evidence on the relationship between the exposure to systematic risk and default probabilities at the individual firm level.This is conducted by dynamically estimating the systematic risk with the Kalman Filter, which simultaneously measures the change in systematic risk by calculating the Kalman Gain.The default probability sorted portfolios exhibit higher correlation for the portfolios with higher default probability.This is consistent with the intuition that the increase in Kalman Gain is positively related to the increase in default probability (i.e. an increase in volatility).

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