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c15 0021-Set3
c15 0021-Set3
c15 0021-Set3
Markets
E (r ) p(1 k )
Z i
j 1
j X ij error
Assets
0
A1 B A2
-S
A1 B A2 Assets
The payoffs to the bond holders are limited to the amount lent B
at best.
h2 [1 / 2 ln( d )] /
2
The KMV model uses the OPM to extract the implied market value of
assets (A), and the asset volatility of a given firm. This is done by
viewing equity as a call-option on the firm’s assets and the volatility
of a firm’s equity value will reflect the leverage adjusted volatility of
its underlying assets. We have in general form:
E f ( A, , B , i , )
and
E g ( )
Where, the bars (-) denote variables that are directly observable.
Since we have 2 equations with 2 unknowns (A,), we can solve..
Copyright 1999 A. S. Cebenoyan 20
The following is a graph that depicts the superior accuracy of
KMV-EDF over agency ratings in capturing expected
default probabilities.
+ relation
•Domestic Money Supply Growth= M / M
+ relation
Copyright 1999 A. S. Cebenoyan 31
Problems
•Measurement
•Population groups (a finer distinction than rescheduler or not)
•Political risk factors
•Portfolio aspects (systematic risk more important)
•Incentive Aspects (Benefits and Costs) Read section
•Stability (of variables)