Credit Risk Modelling and Implementation of Credit Risk Models in China

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Yu, Mengxiao (2007) Credit Risk Modelling and Implementation of Credit Risk Models in China. [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

Credit risk, or the risk of counterparty default, is an important factor in the valuation and risk management of financial assets. It has become increasingly important to financial institutions. A variety of credit risk models have been developed to measure credit risk. They are J.P. Morgan's CreditMetrics; KMV's PortfolioManager based on Merton (1974) option pricing model; macroeconomic model CreditPortfolio View developed by McKinsey; CSFB's Credit Risk+ Model based on actuarial science framework; and Jarrow and Turnbull's reduced-form model.

From the implementation of KMV's PortfolioManager into Sinopec China, the EDFTM for Sinopec in Aug. 2007 is 0.175509% or 18bp approximately. The S&P rating for Sinopec in 2007 is A/BBB+ correspondingly, which is consistent with the credit rating report provided by FitchRatings. On the other hand, the EDFTM for Huaneng in Aug. 2007 is 1.872349%, or 187bp. The S&P rating for Huaneng in 2007 is B+/B, is different from that provided by Moody's China, result from the instability and inconsistency of the Huaneng's share price.

Limitations of the model application in China include difficulties for the accuracy of the results; inadequate valid data in the Chinese equity market; unstable and inconsistent share price; different accounting structure in China; lack of updated software or database to Mapping DD to EDF; government intervention; lack of local certified credit rating agencies; and inadequate information and inconsistent application of criteria and methodologies.

It is recommended that China should enhance stability in the stock market; promote objective, independent and credible credit ratings; and develop financial product innovations to help control and manage credit risk.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 07 Mar 2008
Last Modified: 09 Feb 2018 09:37
URI: https://eprints.nottingham.ac.uk/id/eprint/21395

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