Credit Default Risk Assessment of Local Government Debts Based on KMV Model

Zirong Zhuo, Jixiang Liu and Wenmin Luo

International Journal of Economics and Finance, 2016, vol. 8, issue 5, 230-240

Abstract: With the continuing expansion of Chinese local government debts, its credit risk issues raise the public attention. According to the overall statistics data in Chinese Statistic Bureau, there¡¯re various scales of debts exist, undertaken by Chinese prefecture-level cities¡¯ local government. Some of them exceed the alerting level of international line. In an effort to measure the credit default risk level of Chinese local governments, this paper makes a moderate assessment of credit default risk based on modified KMV model. In conditions of a variety of local government revenue, this model calculates the distance from default and default possibility of local government debts under different guarantee proportion. Meanwhile, this paper also explores the variation of local governments¡¯ credit default risk when they use different financial ratio of financing for the construction of urban infrastructure. Finally, we reach the conclusion that the expected default probability shrinks as guarantee proportion raises, and increases as financing proportion raises; under a 40% of guarantee proportion, expected default rates are low with controllable risks; And within a financing proportion of 50%, chances of default as well as risks, are low.

Keywords: local government debts; modified KMV model; credit risk; probability of default (search for similar items in EconPapers)
Date: 2016
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