Gestion bancaire : le modèle KMV

Sommaire

I Description of KMV Model 2

1.1. 1st Stage: Estimation of the asset value and the volatility of asset return……………3

1.2. 2nd Stage: Calculation of the distance-to-default…………………………………………………..3

1.3. 3rd Stage: Derivation of the probabilities of default………………………..………………………5

II Intermediate conclusion 5

III Strentghs of KMV Model 5

IV Weaknesses of KMV Model 6

Today,with the subprime’s crisis, risk management is a very important issue in financial markets. Moody’s bought the KMV Model.

KMV Model is a structural model inspired from Merton’s model. It is equivalent to an option model that evaluates the implied volatility of the company’s assets.
It relies on Black & Scholes valuation model (1973).

I Description of KMV Model

KMV is a trademark of KMV Corporation that was founded in 1989. The KMV model calculates the Expected Default Frequency (EDF) based on the firm’s capital structure, the volatility of the assets returns and the current asset value. This model best applies to publicly traded companies for which the value of equity is market determined.

The translation of the public information into probabilities of default proceeds in 3 stages:

1.1. 1st Stage: Estimation of the asset value and the volatility of asset return

Financial models usually consider market values of assets, and not book values which only represent historical costs of the physical assets, net of their depreciation. The calculation of the market value of the firm’s assets and their volatility would be simple if all the liabilities of the firm were traded and market-to-market every day.

Alternatively, KMV use the option pricing model to the valuation of corporate liabilities as proposed in “On the pricing of corporate debt: The risk structure of interest rates (Merton, R., 1974 in Journal of Finance 28, 449-470)”. According to this model, we assume that the firm’s capital structure is composed of