Assessing Credit Risk of Companies with Mean-Reverting Leverage Ratios
AbstractEmpirical findings and theoretical studies suggest that firms adjust towards time-varying target leverage ratios. This paper studies the performances of the default probabilities generated from two stationaryleverage models with time-dependent and constant target ratios respectively. The time-dependent model consistently performs better in terms of discriminatory power of differentiating firms' default risk and capability for predicting default rates over the period 1996 to 2006. The model provides appropriate measures of credit risk of firms and evidence to support the existence of a time-varying target leverage ratio.
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Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 042008.
Length: 31 pages
Date of creation: Apr 2008
Date of revision:
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Leverage; Default probabilities; Credit risk;
Find related papers by JEL classification:
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-20 (All new papers)
- NEP-BEC-2008-07-20 (Business Economics)
- NEP-RMG-2008-07-20 (Risk Management)
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