Research On The Relation Between The Default Rates And The Business Cycle

Companies'credit conditions change on the impact of changes in the value of credit assets is nonsymmetrical, credit conditions have improved to increase the value of a credit assets value less than the decline in credit condition deterioration. In another word, Creditors'proceeds from credit satiation improvement is less than credit deterioration, because the liability of the debtors is prior promised, if the debtors received huge gains by borrowing, the creditors will be paid only the loan in full, their proceeds is restricted to credit interest income. If the debtors borrowed the money but failed in the investment, then the creditors might lost some or all of their principal and interest. Therefore, the debt contract can be regarded as an options contract. To creditors, selling loans can be seen as selling put option contracts: When the value of the assets of the debtors decline under the value of credit assets, the debtors would choose default, creditors get the residual value, the creditors'losses equal to the difference between the book value of the credit assets and the actual value of the remaining assets, and the losses of the debtors limited to the equities capital. Conversely, if the debtors invests success, the value of all of their assets is higher than book credit assets value, and the debtors will choose to exercise their debt contracts, such as repay the interest and principal to the banks, just similar with the payment of options fees, all of their losses limited to pay the interest, it is fixed. Companies default or not, depend on the companies' assets value. The assets of companies are restricted by not only the companies' unique characteristics, but also the external environment where the companies operating. Macroeconomic fluctuation impact on the companies' earnings significantly, therefore the business cycle fluctuations will affect the companies'asset value fluctuations. According to Morton's asset value model, if the asset of company is less than a specified threshold value, the company's...