| Description: |
In our research project we continue, inter alia, to analyse several methods of measurement of default probability starting with the traditional accounting-based models. We shall then focus on a credit risk model, which derives the probabilities of default from the prices and volatility of companies’ publicly traded common shares. We shall discuss and justify the model’s assumptions, derive the key formulae, give step-by-step directions for its actual implementation in the Czech Republic and in the EU-wide banking sector and financial markets. In our work we shall highlight the advantages and limitations of this methodology. Furthermore we compute the model-implied probabilities of default for major companies - both domestic and foreign - operating in the Czech Republic and compare the results with traditional indicators of credit risk.
Preliminary conclusions suggest that the first version of the model already applied on the Czech data can be used as an efficient source of information about the underlying credit risk (and default probabilities). Our aim is to introduce and apply - under the conditions of fast developing and more liquid Czech capital market in the near future - an enhanced model which can serve as a quantitative and highly efficient gauge of credit risk both in the Czech banking sector and in the European Union financial markets as well. |
