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On long-term credit risk assessment and rating: towards a new set of models

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  • Hideya Kubo
  • Yasuhiro Sakai

Abstract

Institutional investors are supposed to assess credit risk by using a combination of quantitative information such as option models and qualitative assessments. Although option models can be easily constructed, they are not so suitable for the assessment of long-term credit risk that is required by institutional investors. This is mainly because the probability of bankruptcy varies so widely depending on the timing of assessment. We propose a new set of assessment models for long-term credit risk which does not necessarily use stock prices and may incorporate business cycles. The new grand model consists of the two pillars: a long-term cash flow prediction model and a credit risk spread assessment model. The calculated values derived from these models are effectively usable for reasonable calculation of risk spreads. It is quite interesting to see that our investigation indicates that rating bias may exist in the credit risk assessment of the market.

Suggested Citation

  • Hideya Kubo & Yasuhiro Sakai, 2011. "On long-term credit risk assessment and rating: towards a new set of models," Journal of Risk Research, Taylor & Francis Journals, vol. 14(9), pages 1127-1141, October.
    • Handle: RePEc:taf:jriskr:v:14:y:2011:i:9:p:1127-1141
    DOI: 10.1080/13669877.2011.571793
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    References listed on IDEAS

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    1. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    2. Zhou, Chunsheng, 2001. "The term structure of credit spreads with jump risk," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 2015-2040, November.
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    Cited by:

    1. Ephraim Matanda & Eriyoti Chikodza & Farai Kwenda, 2022. "Fuzzy structural risk of default for banks in Southern Africa," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2141884-214, December.
    2. M. Naresh Kumar & V. Sree Hari Rao, 2015. "A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime," Papers 1502.00882, arXiv.org.
    3. M. Naresh Kumar & V. Sree Hari Rao, 2015. "A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 83-102, June.
    4. rahmat, aidatul ain, 2019. "Corporate Governance and Performance of BreadTalk Group Limited," MPRA Paper 97196, University Library of Munich, Germany, revised 28 Nov 2019.

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