Modelling credit risk using Merton-KMV model: evidence from selected Indian firms

Kumar Sudheer Raj and Mahadev Ota

International Journal of Business Continuity and Risk Management, 2024, vol. 14, issue 2, 119-138

Abstract: This paper focuses on the credit risk modelling of Indian companies, with the aim of determining their likelihood of default. The study uses the Merton model to estimate credit risk and the KMV¹ model to verify the results. Additionally, the Altman Z-Score model is used to provide an alternative approach to credit risk modelling. The paper shows that the financial metrics of a firm are a critical determinant of credit risk, with firms that have worse financial metrics being more likely to default. The paper's findings are relevant to investors and other stakeholders who rely on credit ratings to make investment decisions. By providing a better understanding of the creditworthiness of Indian firms, the paper may help investors to make more informed investment decisions. The study also contributes to current finance research by providing alternative methods for estimating credit risk. Overall, the paper's empirical analysis shows that credit risk modelling is a crucial tool for measuring the creditworthiness of firms. The study provides a comprehensive analysis of the likelihood of default in Indian firms.

Keywords: Merton KMV; credit risk modelling; Altman Z-Score; default probability; asset; volatility. (search for similar items in EconPapers)
Date: 2024
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