A Cyclicality Linked Corporate Short-Term Credit Model - Solvency Ratio Approach

39 Pages Posted: 19 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 9, 2005

Abstract

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

Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang, A Cyclicality Linked Corporate Short-Term Credit Model - Solvency Ratio Approach (May 9, 2005). Available at SSRN: https://ssrn.com/abstract=757926 or http://dx.doi.org/10.2139/ssrn.757926

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Tsung-Kang Chen

National Chiao Tung University ( email )

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

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