KMV Model And Its Test-based On The Adjustment Of Stock Price

Credit risk management has been in the center of bank's risk management. With the acceleration of the process of financial globalization, intensification of competition in the banking sector, credit risk measurement and management technologies demand continuous improvements. Merton model takes the relationship between value of the company assets and company liabilities as the most important feature. By assuming that the two structures remain fixed, Merton model has done a pioneering study on the possibility of default of corporate bonds, thus becomes the theoretical cornerstone of structural model. Reduced model developed by Jarrow relaxed some hypothesis of structural model, thus made it possible to judge credit risk of small and medium-sized customers.Among the many credit risk measurement models, KMV model, which is based on Merton's Option Pricing Theory, is considered as a effective tool for measuring default risk. In a structured model, it assumes that the only factor causing instability in stock price is rooted from the instability of company's net asset value. So the only risk considered in this model is the company risk. However, stock prices are subject to market factors. In particular, when the market is in drastic fluctuation, market factors may have greater impact on the stock prices. The research subject of this paper lies in trying to certify that if such impact is excluded, stock price changes won't be in the course of the effect of market factors and fully reflect the assets value of the company. So the EDF would truly reflect the creditworthiness will make KMV model a more effective tool in measuring default risk.Measurement of credit risk is an extremely complex systematic work. This article begins with the core position of credit risk measurement. Using factors of credit risk measurement for clues, it then explains the theories of credit risk management. The main contents of this part include the concept of credit risk, its characteristics. Next, the paper gives brief introduction to the modeling idea, assumptions, input variables and output variables of those commonly used models for credit risk measurement. In this part, traditional methods and modern measurement models are taken and compared. Then Comparative analysis is done on the characteristics, usage, advantages and shortcomings of these models. The traditional methods take expert law, and credit scoring method as examples, while modern quantitative models take structured model as examples. While discussing the share price amendments in KMV model, this article first explains modeling idea and assumptions. Combined with the current environment of China's financial markets, this article puts forward that before applying the KMV model to the measurement of company's default risk, the market factors which affect stock prices should be removed, so that the measurement of default risk can be more accurate and scientific. In the end this article presents some factors that have limited the credit risk measurement in China's commercial banks and comes to the conclusion that using KMV model with modified equity price to measure credit risk is suitable to China's national conditions.