Applying KMV Model to Credit Risk Assessment of Chinese Listed Firms

KMV model is one of the most popular models of credit risk assessment of listed firms in nowadays. But before being used in China, some modifications have to be made to it. Then by Newton-iteration, we can get the numerical solutions of the recessive non-linear equations, which can be carried out in a Matlab program. Through analyzing 6 stocks´ data of two industries in China from the year 2003 to 2008, we get the conclusion that: after being modified, KMV model can differentiate the ¿ ST¿ firms and the normal firms, the good firms and the better firms, by comparing their distance-to-default (DD) when they are all within the same industry. Seeing from the trend line of DD it can also forecast the firm´ s default probability in following years. But because of the immaturity of Chinese stock market and absence of experiential default database, we are only in the trying stage of applying KMV model in China.