The KMV Model's Implementation And Application

Moody's KMV model is a popular commercial tool of the structural credit risk model pioneered by Merton (1974).This paper modifies the setting of the model's parameter to fit the fact we found in the security markets in China. This paper proposes a transformed-data maximum likelihood methodology for estimating the unobserved asset value and the endogenous parameters required for implementing the KMV model, as to substitute the traditional KMV's methodology.Then, we choose some valid time series samples of corporations from Shanghai and Shenzhen Stock Exchange between 1997 and 2007 to implement the KMV-Merton model. We regard that when a company is 'special treated' as the mark of financial distress. Eventually, we induce out the credit level of the corporations and the actual default possibility. The outcome reveals that the credit quality of the corporations in China is lower than the average of that in the world, they have higher default possibility.At the end, we choose five corporations as the examples to apply the KMV-Merton model. The KMV-Merton model can measure the credit risk of the examples, but we must analyze the personal status of the corporation. So as, if a bank want to manage its credit risk, the better chose is the internal ratings-based (IRB) model rather than directly using the outcome from the external credit rating organization.