Credit risk – reduced form
approach
This study
involved the calibration/evaluation of Reduced Form Approach
in calculating the
credit risk. Reduced-form model is used to examine the financial statement specifically
total assets, short term
liabilities, long term liabilities, capital surplus
and the total equity, of the selected 20
companies under iTraxx Europe
informational data. The researcher used descriptive method of research as it employs
randomize published data for this paper.
I proposed here that the common and traditional useful credit model
such as default discrimination and relative value analysis. The researcher investigate the
ability of the reduced-form model to determine the defaulting and un-defaulting
company. I examine the reduced-form model through commutative distribution
analysis, distribution of default probability, multiple regression and analysis
of variance (ANOVA). I assess the model based from the selected 20 companies
from iTraxx Europe informational data. The researcher found out that the total assets, capital surplus, long term liabilities, short
term liabilities and total equity has a complete impact to the credit risk
arena. And there is no need for the investors or companies to determine which model
will help them to identify the level of credit risk. I suggest that you have
to get the financial statement of the creditor to identify the credit risk. The researcher
found out that if the total assets is
greater than the total liabilities there is no credit risk.
I also check the
ability of the Reduced-form model to predict the power of this model. The
objective of this paper is to determine the calibration/evaluation of Reduced
Form Approach in calculating the credit risk level of the twenty selected
companies under iTraxx Europe informational
data. The researcher test the reduced form approach based on Aczel (1999), in separating
the defaulter companies and non defaulter companies. I arranged this paper as
follows: Section 1. Introduction, Section 2. Full Model and Reduced form approach,
Section 3. Related Literature, Section 4. Parallel Framework, Section 5. Data
and Empirical Methodology, Section 6. Results, Section 7. Conclusion , and
Section 8. Appendices