Research On Credit Risk MKMV Model And Its Application

In the process of economic globalization, the financial system which is characterized by financial innovation shows growing volatility as it going mature. This uncertainty is generated by market pricing. As a result, while financial system weights growing importance in the economics, it is even more urgent for people to take control of financial risk, and financial risk management becomes a core problem in financial fields recently decades.Among all the risks which a financial system faces, credit risk is paid much attention due to its special traits such as being hard to be quantified and managed. The main factor that obstacle the advance of credit risk estimation techniques is misunderstanding of definition of credit risk. Fortunately, as people's knowledge about credit risk grows, the advanced estimation techniques gradually become available.Credit risk evaluating techniques went though a three-phase development during its long history, which can be grouped into specialists rating period, financial index analysis period and advanced credit risk modeling period. The development in econometic methods, computer science and numerical analysis provide us with high-class tools to take close look of credit risk.Experts overseas developed a series of credit risk modeling approaches during years of studying and practicing, and the structural model, which can be represented by MKMV model, is an important approach. The Moody's MKMV Co, Ltd applies MKMV model to its clients and derive excellent feedback, which can be used to interpret the advantage of this specific model. However, people are still trying to establish new models or to place more realistic constrains to credit risk model in order to prompt their accuracy. The structural models, such as endogenous default boundary models and exogenous default boundary models with stochastic interest rates, and reduced-form models, as well as CreditMetics model which is based on credit Value-at-Risk are excellent representations of them. In the contrast, China lags both academically and practically. The essential reason is there is no efficiency in bond market. But as China becomes WTO members and the development of financial market, such situation is changing. For example, coporate debt market is established and Shibor (Shanghai inter-bank operating rate) is presented as market yardstick. These improvements enable financial institutes focusing their sources on modeling credit risk. Under this circumstance, the author wishes to find out an appropriate quantitive measurement for credit risk by comparing various of structural models, and apply it to price debt products.This essay is arranged as follows.(1) First it will explain how the credit risk structural models evolve. The author will explicitly explain the modeling methodology of each model, from the basic Merton model to well-used MKMV model and exogenous default boundary models such as KRS, LS model, as well as endogenous default boundary models like Black/Cox and Leland model.(2) Second, on the basis of comparison of structural models, the author points out that MKMV model can be applied to domestic listed companies, and will make empirical analysis using data of 2005.(3) Third, by analyzing credit risk, the author applies the result to pricing short-term financing bond in order to find out the deterministic factors that affects credit risk premium.