EXAMINING THE IMPACT OF DEBT MATURITY TIME, EXPECTED RETURN AND VOLATILITY ON PROBABILITY OF DEFAULT IN CREDIT RISK MODELLING: THE CASE OF MERTON AND MKMV MODELS
Journal: INTERNATIONAL JOURNAL OF ENGINEERING SCIENCE TECHNOLOGIES (Vol.7, No. 1)Publication Date: 2023-01-31
Authors : George Jumbe; Ravi Gor;
Page : 29-42
Keywords : Default Risk; Debt Maturity Time; Volatility; Merton Model; MKMV Model; Expected Return; Distance to Default; Probability of Default;
Abstract
In order tomodel default risk, this article examines the impact of debt maturity time, volatility, and expected asset return on probability of default (PD). The study compares the probability of default produced by the Merton and Moody's KMV (MKMV) methodologies and add modifying time, volatility, and expected return on assets to see how they affect the probabilities of default produced. It utilizes the balance sheet from Apple Inc. (AAPL) recorded from 2019 September 29 to 2022 September 29 for the current and total liabilities and asset values in order to calculate the Probability of Default. The process begins by determining the distances to default (DD) for Merton and MKMV using the balance sheet, and then use the DDs to determine the likelihood of default (PD). Results indicates that, the MKMV approach compares favorably to the Merton approach
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Last modified: 2023-02-01 18:48:44