A Cyclicality Linked Corporate Short-Term Credit Model - Solvency Ratio Approach
39 Pages Posted: 19 Jul 2005
Date Written: May 9, 2005
This study incorporates industrial cyclicality with the corporate solvency ratio process to develop a state-dependent solvency ratio model with parameters varying according to the changes in the state of the industrial economy. A mean-reversion cyclicality process is established to provide projections of future states of industrial economy. The solvency ratio model can generate simulations to spawn the solvency ratio distributions of each future period. With these distributions, we can obtain both the probability of a company's liquidity crunch and its expected liquidity gap in future periods. To perform the model needs only publicly available information of corporation finances and the industrial cyclicality information. The empirical results are corroborative.
Keywords: Cyclicality, Solvency Ratio, Multi-period short-term credit model
JEL Classification: G33
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