Research On Credit Risk Measurement Of Debt Financing Instruments In China

In recent years,China's bond market has developed rapidly,the size and quantity of the bond issue are growing rapidly,especially the fast development of corporate bonds.The prosperity of the China's bond market can enhance vitality to financial market,but also brought a certain degree of credit risk.In the two quarter of 2016,there was an upsurge of defaults on bonds.Risk management in the bond market not only impacts the market's future development,but affects the stability of the financial system.As the credit evaluation system in China is being materialized,ratings are the major calibers of credit risk.Time lag in the change of ratings impedes investors' ability to limit their exposure.A more forward-looking tool is thus needed in evaluating and managing credit risk.This paper performs an empirical analysis on the credit risk of debt issuance using KMV model,and analyzes the applicability of KMV model in China.This paper uses data from debt registered with the National Association of Financial Market Institutional Investors.Key parameters in KMV model are also modified based on China's market data,which were collected from 1008 sets of debt financing instruments for analysis.The basic framework of empirical analysis is: Firstly,calculate the asset value and its volatility;secondly,calculate the default distance,and finally estimate the expected default probability through the default distance.Through comparing the monthly average Distance to Default(DD)of bonds with different ratings,this paper finds that results from KMV model complies with credit ratings,meaning that DD of bonds with high ratings is significantly larger.But it only distinguish enterprises with AAA rating from others,it is not obviously about the division of AA-,AA and AA+ enterprises.This paper thus concludes that the modified KMV model can be a useful tool in evaluating credit risk of the issuer,but it is not obviously about the division of AA-,AA and AA+ enterprises.In addition,the expected default probability is calculated by theoretical method,and the corresponding relation and sensitivity between the default distance and the expected default probability are further analyzed.The analysis shows that the default probability is more sensitive to the range of 2-4default distance.Finally,based on the empirical results of the article and the actual situation of China's bond market,this paper puts forward some deficiencies and suggestions for improvement.