A Flow-Based Corporate Credit Model

27 Pages Posted: 7 Jul 2009

See all articles by Tsung-Kang Chen

Tsung-Kang Chen

National Chiao Tung University

Hsien-Hsing Liao

National Taiwan University

Chia-Wu Lu

National Taiwan University - Department of Finance

Date Written: June 5, 2005

Abstract

This study develops a flow-based corporate credit model that is able to generate concurrently and endogenously a firm’s multi-period probabilities of liquidity crunch and expected liquidity shortfalls. Based upon a state-dependent internal liquidity model, it incorporates both systematic and idiosyncratic shocks into corporate internal liquidity dynamics. It is different from structural form credit models in that it considers a flow-based insolvency rather than a stock-based one, and has a potential to capture short-term credit information. Additionally, it is different from both reduced form and traditional accounting-based bankruptcy prediction models in that it is able to provide multi-period expected liquidity shortfalls endogenously.

Keywords: internal liquidity, liquidity crunch, flow-base credit model

JEL Classification: G32, M41

Suggested Citation

Chen, Tsung-Kang and Liao, Hsien-Hsing and Lu, Chia-Wu, A Flow-Based Corporate Credit Model (June 5, 2005). Available at SSRN: https://ssrn.com/abstract=1430065 or http://dx.doi.org/10.2139/ssrn.1430065

Tsung-Kang Chen

National Chiao Tung University ( email )

No. 1001, Dasyue Rd., East Dist.,
Hsinchu City, 300
Taiwan

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Chia-Wu Lu

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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