A Cash Flow Based Multi-Period Corporate Credit Model

55 Pages Posted: 6 Jul 2005

See all articles by Hsien-Hsing Liao

Hsien-Hsing Liao

National Taiwan University

Tsung-Kang Chen

National Chiao Tung University

Date Written: May 15, 2004


Among the structural form credit models, this is one of the first few studies that suggest an intrinsic valuation approach that uses the present value of a firm's future cash flows instead of its equity market value to estimate its asset value distribution. We employ an industrial cyclicality linked mean-reverting Gaussian process to model a firm's free cash flows to generate its multi-period unconditional asset value distributions. A firm's unconditional multi-period probability of defaults and expected recovery rates can then be estimated endogenously. The credit information is also useful in pricing corporate bonds.

Keywords: Multi-period Credit Model, Industrial Cyclicality, Cash Flow

JEL Classification: G33, E44, E47

Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang, A Cash Flow Based Multi-Period Corporate Credit Model (May 15, 2004). Available at SSRN: https://ssrn.com/abstract=753304 or http://dx.doi.org/10.2139/ssrn.753304

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106

Tsung-Kang Chen

National Chiao Tung University ( email )

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

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