Credit Risk Measurement Of The Listed Companies In China Based On KMV Model

Since 2007, sub-debt crisis of American has triggered global financial crisis, arises the turmoil of economy worldwide. This reveals a trust crisis in western countries, indicates that the problem of credit is very common. China has entered the WTO since 2001, and has a closer link to the world. The economy has a rapid development. Excellent companies come to the financial market to raise money and grow some listed companies bigger. However, some listed companies expand so fast, caused capital chain pressure or a poor management. This triggered credit risk and brings great loss to investors and debtors. Therefore,it is necessary to identify effectively and control credit risk, which is a core task of the current financial risk management. This is related to the stability of China's financial system, and the healthy development of the economy.The measurement of credit risk is the basis of risk management. There are many mature and advanced credit risk management techniques international, but the difference of economic environment and financial environment between domestic and international makes some of credit risk model is not suitable for our country. It is an important mission to establish China's own credit risk models through learning from advanced management techniques and combining the characteristics of China's financial environment. Listed companies are some of best entrepreneurs in their own industry, and they are the basis of the security market. The quality of listed companies is directly related to the image of Chinese enterprises. In this background, this paper will research on credit risk measurement of the listed companies.Traditional methods of credit risk measurement rely mainly on the financial statements, it is simple, intuitive, easy to operate, but they can not identify the credit risk in time. The effect of measurement is very limited. KMV model is based on stock market, it developed from option pricing theory, by calculating the expected default frequency (EDF), predicts the default possibility of all companies traded in public. Data are dynamic and forward-looking, which can overcome the shortcomings of traditional methods. at the same time KMV method do not need high validity of the securities markets. Data of the model can be found from the stock market and financial statements, so it is very suitable for the application of the securities market in China.In this paper, we use KMV model to measure credit risk of listed companies by a combination of theory and empirical methods. This paper consists of four chapters. Chapter one we illustrate the background, the meaning, and the structure of this paper. Chapter two reviews the academic research of KMV model in measuring credit risk in domestic and foreign,and also reviews the related concepts of credit risk of listed companies , and analyze the causes of default. Chapter three describes the current principles and methods of credit risk management model in developed countries.There is detail information of three traditional methods of credit management metrics: the expert rating system, OCC model and Z score model, also describes the mainstream model of credit risk methods, CreditMetrics, CreditRisk + , CPV and KMV. This chapter illustrates the development and theory of the four models, also analysis of the scope of application and advantages and disadvantages of the previous four models. Compared with traditional methods, modern credit risk technology uses more data of stock market and bond market. Using of ever-changing financial market data to evaluate the credit risk change of company, this measure is dynamic and effective.Chapter four is the core part of the paper, first introduced the principle and the assumptions of KMV model. The model is based on option pricing theory, that look the value of the company and the debt as a call option, and through option pricing model and other equations to establish formula. As we know the market value of company, the volatility of stock price and the debt, so we can calculate the assets value and volatility of asset, and the default distance(DD) .In empirical analysis part, we select 60 listed companies. They are divided into two groups of 30 ST companies and 30 non-ST matching companies for comparison. We use historical return rate method to calculate the volatility of stocks. At present, the majority of Chinese listed companies have been completed the Split Share Reform, and achieved full circulation in theory, however the lock period problem still exist, so we obtain the value of company by calculating the liquid stocks value and illiquid stocks value respectively. In 2008 the Central Band of China has lowered the interest rate several times, this article takes the time-weighted method to determine the rate in this model. The choice of default point in the model is an innovation in this article, we uses different coefficient of the long-term debt to determine default point. Using the above variables, we can obtain the value of the assets and their volatility through nonlinear equations. And then we can have the default distance (DD) of each sample, analyze the DD value. KMV model can identify credit risk of listed companies effectively. Through empirical analysis, we can see that the KMV model can meet the need of credit risk management in China. On the one hand, the data needed in KMV model can be obtained by the use of annual financial statement and stock market information. It is objective and impartial, offsets the lack of professional rating agencies in China. On the other hand, we can computer programs to do data process of the large number. So the application of the model is very convenient. Therefore, KMV model has a broad prospect in China, and can promote credit risk management level of China.The last part is a summary of KMV model, and gives the follow-up study suggestion for the selection of variables in the model and how to expand the usage range of the model, also for how to strengthen credit risk management in practice.In general, to explore and research the KMV model will enhance the level of financial risk management in China, and has a positive and practical meaning to China's economic development. With the continuous improvement of our capital markets, the disclosure of information and data more timely, KMV model will play a more active role in credit risk management.