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

In China, listed companies are an important part of the entire national economy. Listed companies are issuer of stocks and bonds, who is also the bank’s major borrowers. Lack of credibility of listed companies will bring tremendous negative impact in China’s economic development, not only is not conducive to sustainable development of listed companies, but also endanger the healthy development of the stock and bond market, and even affect the financial system and overall economic stability. Therefore, the credit risk of listed companies should grasp the first place, but to take credit risk, we must first measure of credit risk.In the developed countries, there is a comprehensive credit risk measurement system. The late 60s of the 20th century, the emergence of multiple discriminant analysis is the beginning of the modern credit risk measurement. Altman’s Z-Score method is one of them. Z-Score method is a multivariate credit scoring model based on financial data. The 20th century 90’s, the credit risk measurement methods developed rapidly. People gradually accept and use modern credit risk models. Modern credit risk models include:KMV’s KMV model, JP Morgan’s Credit Metrics model, Credit Suisse’s Credit Risk+ model, McKinsey Company’s Credit Portfolio View model, In China, the company’s credit risk measurement is comparatively backward. Most Chinese banks and rating agencies used the traditional method such as expert method and 5 classification method.There is still a considerable gap between China’s credit risk measurement methods and abroad. To better grasp the credit risk of listed companies, we need to adopt new approach which fit the conditions of China. Studying advanced measurement methods and introducing the method which is suitable for China has become the academic consensus. KMV model is the most suitable credit risk measurement approach for listed companies. The KMV Company has used the model to predict the bankruptcy of Enron. The model use stock data and corporate financial data as a primary input to measure the credit risk of listed companies and it has good theoretical support and simple to use.However, if there is no objective validity of testing, the use of the complex credit risk models can not only get the benefits, but also result in greater losses because of measurement errors. China’s market has its own particularity. Whether a good model which is suitable for Western countries is suitable for China is a big problem. Therefore, this article wants to answer the following question:Are the using of KMV model to measure the credit risk of listed companies in China effective?The first chapter introduces the relevant studies of the KMV model. The second chapter introduces the content of KMV model. The third chapter introduces the particularity of the Chinese market, and analysis the unique constraints of the model using in China. The fourth chapter design empirical method to test the validity of KMV model. The fifth chapter analyses the empirical results and reach a conclusion.In theory, KMV model is quite mature, but the empirical result is not good. Through the analyzing of the empirical results, this paper gives two explanations for this result:First, China’s stock market exit mechanism is not perfect, the existence of shell resource, etc., resulting in stock price containing too much non-company information, making the validity of KMV model failure.Second, China’s stock market prices can not completely rely on market pricing because of fall and up limits.For the above reasons, the environment for using KMV model in China’s listed companies is not ripe.