Quantitative Credit Risk Analysis for BSE-listed Companies - Insights from the Merton and Altman Z-score models
(2024) NEKN02 20241Department of Economics
- Abstract
- Credit activity is essential for financial institutions, acting as the primary means banks deploy resources and generate revenue. As a key indicator of financial distress, corporate default has severe repercussions on investors, creditors, regulators, and policymakers. Credit risk embodies the uncertainty banks confront prior to lending, accounting for the partial or complete non-recovery of loan principal and interest. In their pursuit to innovate in risk management practices, global financial institutions have developed sophisticated warning systems to effectively mitigate credit risk. In this context, the Merton model stands as a seminal contribution to the realm of finance, reshaping the understanding of credit risk by embracing a... (More)
- Credit activity is essential for financial institutions, acting as the primary means banks deploy resources and generate revenue. As a key indicator of financial distress, corporate default has severe repercussions on investors, creditors, regulators, and policymakers. Credit risk embodies the uncertainty banks confront prior to lending, accounting for the partial or complete non-recovery of loan principal and interest. In their pursuit to innovate in risk management practices, global financial institutions have developed sophisticated warning systems to effectively mitigate credit risk. In this context, the Merton model stands as a seminal contribution to the realm of finance, reshaping the understanding of credit risk by embracing a structural approach that integrates option pricing theory with corporate finance principles. Alternatively, the Altman Z-score model is one the preeminent accounting-based credit scoring methodologies, employing a wide array of financial ratios in forecasting the likelihood of
bankruptcy. Despite leading international credit-scoring agencies endorsing modern credit risk models and local regulatory frameworks highlighting the impetuous need for restructuring and addressing systemic deficiencies, Romanian banks continue to face significant credit losses. Notably, the lack of comprehensive institutional default databases, ineffective capitalist mechanisms and pervasive knowledge gaps seem to hinder the risk mitigation process. This study delves into the assessment of credit risk within companies publicly listed on the Bucharest Stock Exchange, leveraging on the theoretical frameworks developed by Robert Merton and Edward I. Altman. While underscoring the feasibility of implementing structural credit risk methodologies within specific exogenous limitations, the study is expected to serve as a catalyst for future domestic research, thereby raising awareness among both regulatory bodies and industry specialists regarding the multifaceted constraints intrinsic to the Romanian operational context. Ultimately, this paper constitutes the premise for advancing Romania’s harmonization with global credit-scoring methodologies, highlighting the theoretical advantages offered by actuarial models. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9156315
- author
- Ciho, Andrei-Lucian LU
- supervisor
-
- Hans Byström LU
- organization
- course
- NEKN02 20241
- year
- 2024
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- credit risk, corporate default, Merton model, Altman Z-score model, Romanian financial market
- language
- English
- id
- 9156315
- date added to LUP
- 2024-08-12 15:55:19
- date last changed
- 2024-08-12 15:55:19
@misc{9156315,
abstract = {{Credit activity is essential for financial institutions, acting as the primary means banks deploy resources and generate revenue. As a key indicator of financial distress, corporate default has severe repercussions on investors, creditors, regulators, and policymakers. Credit risk embodies the uncertainty banks confront prior to lending, accounting for the partial or complete non-recovery of loan principal and interest. In their pursuit to innovate in risk management practices, global financial institutions have developed sophisticated warning systems to effectively mitigate credit risk. In this context, the Merton model stands as a seminal contribution to the realm of finance, reshaping the understanding of credit risk by embracing a structural approach that integrates option pricing theory with corporate finance principles. Alternatively, the Altman Z-score model is one the preeminent accounting-based credit scoring methodologies, employing a wide array of financial ratios in forecasting the likelihood of
bankruptcy. Despite leading international credit-scoring agencies endorsing modern credit risk models and local regulatory frameworks highlighting the impetuous need for restructuring and addressing systemic deficiencies, Romanian banks continue to face significant credit losses. Notably, the lack of comprehensive institutional default databases, ineffective capitalist mechanisms and pervasive knowledge gaps seem to hinder the risk mitigation process. This study delves into the assessment of credit risk within companies publicly listed on the Bucharest Stock Exchange, leveraging on the theoretical frameworks developed by Robert Merton and Edward I. Altman. While underscoring the feasibility of implementing structural credit risk methodologies within specific exogenous limitations, the study is expected to serve as a catalyst for future domestic research, thereby raising awareness among both regulatory bodies and industry specialists regarding the multifaceted constraints intrinsic to the Romanian operational context. Ultimately, this paper constitutes the premise for advancing Romania’s harmonization with global credit-scoring methodologies, highlighting the theoretical advantages offered by actuarial models.}},
author = {{Ciho, Andrei-Lucian}},
language = {{eng}},
note = {{Student Paper}},
title = {{Quantitative Credit Risk Analysis for BSE-listed Companies - Insights from the Merton and Altman Z-score models}},
year = {{2024}},
}