EXAMINING THE IMPACT OF DEBT MATURITY TIME, EXPECTED RETURN AND VOLATILITY ON PROBABILITY OF DEFAULT IN CREDIT RISK MODELLING: THE CASE OF MERTON AND MKMV MODELS

George Jumbe; Ravi Gor

doi:10.29121/ijoest.v7.i1.2023.442

EXAMINING THE IMPACT OF DEBT MATURITY TIME, EXPECTED RETURN AND VOLATILITY ON PROBABILITY OF DEFAULT IN CREDIT RISK MODELLING: THE CASE OF MERTON AND MKMV MODELS

George Godfrey Jumbe·George Jumbe·Ravi Gor

International Journal of Engineering Science TechnologiesJanuary 18, 2023DOI: 10.29121/ijoest.v7.i1.2023.442

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Abstract

In order to model default risk, this article examines the impact of debt maturity time, volatility, and expected asset return on probability of default (PD). The study compares the probability of default produced by the Merton and Moody's KMV (MKMV) methodologies and add modifying time, volatility, and expected return on assets to see how they affect the probabilities of default produced. It utilizes the balance sheet from Apple Inc. (AAPL) recorded from 2019 September 29 to 2022 September 29 for the current and total liabilities and asset values in order to calculate the Probability of Default. The process begins by determining the distances to default (DD) for Merton and MKMV using the balance sheet, and then use the DDs to determine the likelihood of default (PD). Results indicates that, the MKMV approach compares favorably to the Merton approach.

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Jumbe, G., & Gor, R. (2023). EXAMINING THE IMPACT OF DEBT MATURITY TIME, EXPECTED RETURN AND VOLATILITY ON PROBABILITY OF DEFAULT IN CREDIT RISK MODELLING: THE CASE OF MERTON AND MKMV MODELS. International Journal of Engineering Science Technologies. https://doi.org/10.29121/ijoest.v7.i1.2023.442

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EXAMINING THE IMPACT OF DEBT MATURITY TIME, EXPECTED RETURN AND VOLATILITY ON PROBABILITY OF DEFAULT IN CREDIT RISK MODELLING: THE CASE OF MERTON AND MKMV MODELS

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