Surveys On Credit Risk Models And Credit Rating

Financial globalization ,especially the creation of financial theory and risk control technology, makes management of credit risk and credit rating the base and core of modern financial setups. It has been a rough task that the financial field must confront with that how to reduce financial risk to a smallest degree so as to make financial system base of supportive of social economy and approach the aim of diffusing economic risk.Considering our current situation, though we have a very good beginning of credit risk, there are still many problems on credit risk management and defending system compared to completed state credit management system of developed market economy countries: the establishment of our social credit system shows different levels, stages, and fragmenting; the authentic social credit system suitable for market economy demands is still not established; imperfect laws; uncontrolled social credit service setups; unshared credit information; enhancement of social credit risk exposure and evaluation and etc.In recent years, the measurement and methods of management of credit risk have shown revolutionary changes for increase of structure of bankruptcy of enterprise, disintermediation, decline of mortgage value and its waving increase and the improvement of information technology. Credit risk models'occurrence and development is relatively concerned. In order to defend credit risk, all financial entities must establish a very effective management system which can cope with recognition, measurement and control of all kinds of risks so to approach to the big aim of complete self-controlling, reasonable structure, effective organization , and scientific conducting idea. Credit risk is a key component of financial faculties risk management system. The accuracy of measurement of risk models will be more critical for effective defending and supervising of credit risk. So it is a very important measure to establish credit risk models for risk defending and risk management. Some traditional methods are difficult to define and measure the existing credit risk in financial faculties. Models which can objectively and scientifically measure market risk and risk control should be established. Measurement of market risk and credit risk is not only beneficial to risk management but also helpful to effective control for supervisors. As a suitable means of risk measurement especially to measure market risk which is derived tool out of the field, how to measure and control financial risk with quantitive method is a problem that financial setups and supervising administration have to confronted with.On the above question, I express my comprehensive opinion about credit risk models and relative credit rating models. In the first part, I expound the credit risk structure and brief models and their applications in fixing prices for CDS and CDO products by presenting basic definitions and principles of credit risk models. In the second part, the relative credit rating models are described.Credit risk stems from the instability of abilities of debtors to carry out their obligations. Owning to their expectations to maximize future repayment or cash flow hedging strategy when investors securitize their investment combination, there have been many theoretical definitions and many credit products being carried out currently. Such as straddle and non-straddle theory, risk medium probability measurement, short-term interest procedure, risk medium price, jump-diffusion, CDS, CDS price difference, Zero-interest securities, CDO, CDO single securities difference and so on, should be estimated according to multiple choices of guarantees funds and individuals, companies, and government investment. At least there are three factors which can confirm those basic models of the relative credit products: infringement of multiple reference entities and infringement relation models; cash current structure of products, market information.If the assuming information is complete, the market data shows the probability of the infringement of debtors. There are two basic models to describe infringement. Structure discussion is first introduced by Merton(1974). He makes the discussion on the base of Black and Scholes'works which wins Noble Prize about options pricing problems of individual company infringement models. The latest documents suitable for multiple entities'infringement and relative structure via connecting words are expanding the exploration on the structure. The other easy-controlled one is constrained model, which makes models directly for infringement strength. In affine sets ,many products can be priced by explicit formula, parameters can also be estimated by moment estimation or likelihood estimation in accord with market historical data. Cf.Artzner and Dellbaen(1995) or Jarrow and Turnbull. The model is widely spread by Duffie and Singleton(1995).Credit structure model in condition of complete information. Structure models try to explain individual customer's infringement or the changes of credit quality via presuming the micro-economic characteristics of financial products or economic units. For example, the proportion between property value and liability may determine clients'credit quality. Those random variables which are used to determine clients'rating changes (including infringement) are called rating transition risk factors. In structure models, the relativity of rating transition risk factors among clients should be evaluated and determined. Single company infringement is the model on base of Black-Scholes model. The infringement factor models include single factor models and multiple factor models. The structure model price-fixing mainly shows pricing for CDO and credit infringement exchange, which is mainly to demonstrate pricing for standard CDS and CDO and the methods in detail.The influence of incomplete information. Market information is always neglected in some credit risk documents for the characteristics of instability in most credit products. As mentioned in the paper, market information is playing a very important role in determining the price of sub-products of credit products. Incomplete market information can weaken the language market movement ability of investors. Additional commission will be increased for the instability. Market investors can not see the authentic information of the studied entities due to disturbance and postponement of rendering account or other reasons. The structure models of incomplete information takes effect assuming the scope of the infringement has been known. If the distribution of the infringement scope has been known, the last method is to obtain the value of infringement scope and to study it from the perspective of the single factors observation and multiple factors observation of incomplete information field flow and the pricing for incomplete information.Brief credit models. It is different from structured models. Brief models are not trying to demonstrate infringement and the transition of credit rating. But to select a kind of statistical method and set up suitable factor models to describe the phenomenon of infringement or transition of credit rating. In brief models, it is assumed that there is a kind of functional relation between clients'expected infringement rate or transition matrices and observable macro-economic procedure indexes or unobservable random risk factors. It considers that it is the dependence on public factors or relative background factors of financial condition of single client that produces the relativity of infringement rate among clients and credit rating transition.Brief credit models under the condition of complete information. The paper introduces some brief models, such as strength models, strength models in the course of affinity, reliable models in the infringement. Brief models pricing under the condition of complete information are brief models based on affine assumption strength, whose main parameters needed evaluating come from affine models. It will be input into calculation of Riccati ordinary differential equations. Credit infringement exchange CDS pricing mainly includes standard CDS pricing, pricing for infringement securities, revised CDO pricing and so on. The paper still introduces the incomplete information brief models and pricing with the condition of incomplete information.In the second section, the establishment of credit models needs large amount of parameter evaluation during the course of credit rating, such as infringement probability, infringement loss rate, and probability of credit rating transition, which are evaluated on the base of historical experienced data. Multiple variables credit risk judgment models are standard models established by quantity statistical methods reduction taking characteristic financial ratio as demonstrating variable. The models are carried out to predict the probability of some special affairs to find out the signals of credit crisis according to which that investors and creditors can transfer their investment , manage account receivable and make decision of loaning This kind of models is most effective in application in all of the world. It is still regarded as the main method by international financial and academic field. In short, there are linear probability models, Logit, Probit models and judgment and analysis models. Among them, multivariate discriminant analysis is most popular, and the models of Logit occupies the second position.There are not best model. Suitable models should be selected according to data. Statistical analysis should be emphasized on. Availability of probable models should be discussed to determine models frames suitable for data. Modern information technology and structured credit models, brief credit models, models of 2-dimension judgment analysis on multi-variables credit risk should be actively used. The parameters experience pricing in credit models is also very critical to practical aims. Whenever it is probable, maximum likelihood estimation is always a better selection.After entering WTO, the markets of our country, especially financial markets are completely exposed in international market risks it is a prior problem for the current financial market creation that how to use modern technology and credit risk and credit rating models . In short, manager of financial markets should actively take advantage of modern technology and credit risk and all kinds of models during the course of credit rating to guarantee risk control and evaluation results scientific, reasonable, objective, and impartial, so as to promote the financial faculties of our country and credit rating, and make them specialist, standardization, authority, public confident efficacy and developed harmoniously to establish better base for challenges from financial globalization.