Probability of Default Estimation Model for Listed Bank Based on Minimum Error

The main trouble to calculate the probabilities of default of listed banks with KMV model is that the coefficient of long term liabilities γ is uncertain. The probabilities of default can also be calculated according to credit spreads of financial bonds. Following the idea to minimize the differences between the probabilities of default calculated by KMV model and the probabilities of default according to credit spreads, a non-constrained programming model is established to determine the optimal value of γ for calculation of default points of listed banks. Adopting the optimal value of γ, the probabilities of default of listed banks without financial bonds issued can be estimated with KMV model, and the probabilities of default calculated are consistent with the situation in the credit market.