A Study On Stuctural Credit Risk Models Based On L-T Model With China's Listed Companies

Since 1990s, the world's economy has been destroyed seriously by 7 large financial crisis. Before these, the world's finance industry had attachded very importance to the financial risk, especially the credit risk, then the foreign scholars developed a series of quantitative models to measure and manage the credit risk.The structural model of credit risk is one kind of credit risk quantitative models,these quantitative models has played an important role for foreign financial institution to keep away modern credit risks. With the developing of China's financial market, China's financial institution will need to upgrade the ability of quantitatively measuring and managing the credit risk urgently. The author hopes that this paper's research on the structural models of credit risk can give some consultation to Chinese financial institution to defend and manage the credit risk. So this paper deeply reviews the method of modeling the structural model of credit risk, especial the L-T model; then does an empirical study in China based on the L-T models, research results can be presented as the following three main aspects: First, this paper roundly expatiates the modeling method of three most representative structural models of credit risk which including Merton model, L-S model and L-T model. The paper reviews the differences and the characteristics of these three models deeply, and also gives the mathematic formula and method to calculate the expected default frequency (EDF) in these models. These can fill the gap in China's recent domestic research on the structural model of credit risk. Second, the Chinese scholars mostly focus on the Merton model to do empirical studies based on structural models now. This paper presents an empirical study in China using the LT model. The paper gives the details of how to get the model's parameters based on the special conditions of China's capital market, it is a useful experiment of structural models applying to publicly traded companies in china.The paper gets the conclusion that the EDFs calculated from the L-T can give a good description of the credit risk of the publicly traded companies. Since the EDFs vary substantially for companies of different credit ratings, the model is quite effective in assessing the credit risk of the publiclyses the credit risk of Chinese publicly traded companies through their EDFs. Based on these research conclusions,the author gives some suggestions to the development strategy of China's corporate debt market.