A CRITICAL APPRAISAL OF COMPANY BANKRUPTCY PREDICTION MODELS

Abstract

Study discusses four models representing credit risk theories. KMV has powerfully criticized the utilization of transition possibilities by Credit Metrics that is predicated on the average historical frequencies of defaults and credit migration. As discovered by Crouhy et al. (2000), KMV objects on the 2 crucial assumptions of Credit Metrics: (1) all corporations at intervals identical rating category have identical default rate, and (2) actual default rate is adequate to the historical average default rate. KMV considers this can't be true since default rates area unit continuous, whereas ratings area unit adjusted in separate manner. KMV has verified, through a simulation exercise, that the historical average default rate and transition possibilities will deviate significantly from the particular rates.