Estimating Multi-Period Corporate Credit Risk - A Cash Flow Based Approach

67 Pages Posted: 23 Mar 2007

See all articles by Hsien-Hsing Liao

Hsien-Hsing Liao

National Taiwan University

Tsung-Kang Chen

National Chiao Tung University

Chia-Wu Lu

National Taiwan University - Department of Finance

Date Written: May 15, 2004

Abstract

Of all the structural form credit models, this is one of the first studies to suggest using a firm's future cash flows to estimate its asset value distribution, rather than employing a firm's equity market value. We employ a state-dependent free cash flow process to generate a firm's multi-period unconditional asset value distributions and therefore to obtain the firm's multi-period unconditional probability of default and expected recovery rate endogenously without the controversies of the Merton-type models. The results of an empirical comparison with four famous structural form models in estimating corporate credit risk show that the proposed model outperforms the others in both good and poor credit quality samples.

Keywords: Multi-period Credit Risk, Structural Form Model, Cash flow

JEL Classification: G30

Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang and Lu, Chia-Wu, Estimating Multi-Period Corporate Credit Risk - A Cash Flow Based Approach (May 15, 2004). Available at SSRN: https://ssrn.com/abstract=971771 or http://dx.doi.org/10.2139/ssrn.971771

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

Chia-Wu Lu

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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