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Expected Default Measures in the KMV model and the Market-based model

He, Kuang LU (2012) NEKP02 20121
Department of Economics
Abstract
Two credit risk models are applied to calculate the expected distance to default in a sample of 32 Chinese listed non-financial companies from 2006 to 2011.One is the KMV(Merton) model under the machinery of option pricing and other is the market based model relied on a conditional version of capital asset pricing model(CAPM). The results imply that both KMV model and the market based model are valid to distinguish risky firms and profitable firms. Through regression analysis on the difference of two models with the interaction effect of leverage ratio and equity volatility, this study indicates that the market based model has better ability to identify the default risk in highly leveraged firms. Also, the predictive accuracy of the... (More)
Two credit risk models are applied to calculate the expected distance to default in a sample of 32 Chinese listed non-financial companies from 2006 to 2011.One is the KMV(Merton) model under the machinery of option pricing and other is the market based model relied on a conditional version of capital asset pricing model(CAPM). The results imply that both KMV model and the market based model are valid to distinguish risky firms and profitable firms. Through regression analysis on the difference of two models with the interaction effect of leverage ratio and equity volatility, this study indicates that the market based model has better ability to identify the default risk in highly leveraged firms. Also, the predictive accuracy of the adjusted KMV model is stable to the change of default points in Chinese stock market, which is different from KMV Company’s existing result. (Less)
Please use this url to cite or link to this publication:
author
He, Kuang LU
supervisor
organization
alternative title
Empirical evidence from Chinese listed companies
course
NEKP02 20121
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Default risk, Distance-to-default, KMV model, Market based Model, Capital Asset Pricing Model (CAPM), Leverage ratio, Equity volatility
language
English
id
3048335
date added to LUP
2012-09-07 11:22:37
date last changed
2012-09-07 11:22:37
@misc{3048335,
  abstract     = {Two credit risk models are applied to calculate the expected distance to default in a sample of 32 Chinese listed non-financial companies from 2006 to 2011.One is the KMV(Merton) model under the machinery of option pricing and other is the market based model relied on a conditional version of capital asset pricing model(CAPM). The results imply that both KMV model and the market based model are valid to distinguish risky firms and profitable firms. Through regression analysis on the difference of two models with the interaction effect of leverage ratio and equity volatility, this study indicates that the market based model has better ability to identify the default risk in highly leveraged firms. Also, the predictive accuracy of the adjusted KMV model is stable to the change of default points in Chinese stock market, which is different from KMV Company’s existing result.},
  author       = {He, Kuang},
  keyword      = {Default risk,Distance-to-default,KMV model,Market based Model,Capital Asset Pricing Model (CAPM),Leverage ratio,Equity volatility},
  language     = {eng},
  note         = {Student Paper},
  title        = {Expected Default Measures in the KMV model and the Market-based model},
  year         = {2012},
}