The Empirical Analysis On The Applicability Of KMV Model In China

Credit risk is one of the main risks for the commercial banks in China. How to improve credit risk measurement and management is a major issue faced by Chinese commercial banks. In Western countries, the credit risk management of commercial banks is relatively mature. They have formed a series of corresponding systems on practice and theory. There is a trend that the measurement of credit risk develops from qualitative analysis to quantitative analysis and its object expands from credit risk of one individual asset to credit risk of portfolios. In comparison, Chinese commercial banks still apply the traditional qualitative method to measure the credit risk and judge the credit risk by expert's experience. Based on the current situation of credit risk management in China, this paper is divided into four parts to analyze the credit risk model and discuss the applicability of these models in China.The first chapter is the introduction. We make a brief explanation for the definition, characteristics, causes and the impact on economic life of the credit risk. Then, we analyze the current situation of credit risk management in China, and suggest introducing Western Credit Risk Models that will help commercial banks improve measurement and management of credit risk.The second chapter is the literature review about the credit risk models. We mainly describe the credit risk models that include the traditional qualitative models and the modern quantitative models in Western countries. This chapter focuses on the four mainstream models: the KMV model, the Credit Metrics model, the Credit Risk~+ model and the Credit Portfolio View model and make a comparative analysis of their advantages and disadvantages, then we find that KMV model can be applicable in China.In Chapter III, we discuss the Merton model that is the theoretical basis of the KMV model and point out the some problems with the Merton model in practice. Meanwhile, we integrate foreign exchange risk into the Merton model for a single firm and then extend the Merton model to several firms. It is an innovation of this paper.Chapter IV is the part for empirical analysis. We selected 12 listed companies, and use their financial information and transaction data to measure their credit risk by the KMV model. We find that the KMV model can be used to identify the listed company's credit risk quite well, but we must improve further the KMV model to adapt to Chinese actual situation.Finally, we derive the conclusion that establishing the credit risk model is an urgent task that will improve the overall competitiveness of Chinese commercial banks, and give some specific proposals for it.