A Study Of Default Probability Of Listed Companies

Credit risk is one of three parts of financial risk, and according to the Basel New Accord , default risk is an important factor of credit risk. Today in China, it is too inefficient about studying the probability of default of listed companies not only in quality but also in quantity. Mainly speaking, the study of probability of default has two directions, one is the choice of model, the other is choice of variable. The study of this paper is followed with the two directions. Due to its dominant function and easy to get data, the listed companies have been chosen as studying objects.In order to give a reasonable foundation of the model, the analysis of cross-sectional distributional properties of financial ratios has been given out. After studying cross-sectional distributional properties of financial ratios of public limited companies of Shanghai and Shenzhen A Stock Market, each group of data displays non-normal distributional. Also normality can not be achieved in certain case such as transforming the data or segregating outliers. So, this paper choose the logistic model to analyze the probability of default.Technical efficiency and distance to default are important factors in explaining financial distress except for financial ratios. The paper utilizes stochastic frontier functions and Merton model to calculate technical efficiency and distance to default of Chinese listed companies, both for special treatment companies and its match companies. It is found that technical efficiency and distance to default are good indicators to forecast financial distress than financial ratios.As a extending of the study, the paper discusses the effects of probability of default upon stock return, the characteristics of credit rating transition matrix of China listed companies, the construction credit risk portfolio.This is the first study that uses Merton's (1974) option pricing model to compute default measures for individual firm of China listed company, and assess the effect of default risk on equity returns. There exists a negative relation between default risk equity return. It can be said in China security market, at least at Shanghai A StockMarket in 2003,there exists a significant negative credit risk premium. Credit ratings changes play a crucial role in many credit risk models. Empirical study shows the rating transition matrix of China listed company is very discontinuous, also is very different from matured markets.