
 A Solvency Based Multiperiod Corporate Shortterm Credit Risk Model by Hsienhsing Liao of National Taiwan University, and May 9, 2005 Abstract: In current shortterm credit risk literature, liquidity crisis prediction model is the main research area. Within this research field, two major models can be classified "classical statistical models" and "stochastic intensity models". However few of them can obtain probability of insolvency and expected ratio of liquidity gap at the same time. In addition, within the above two frameworks, few studies apply stochastic solvency ratio models to predict corporate liquidity crisis. Basing upon the two significant characteristics of solvency ratio "meanreversion" and "nonnegative value" and the concept of varying coefficient model, the study develops a multiperiod corporate shortterm credit risk model by constructing an "timedependent stochastic solvency ratio model". It considers the impacts of industrial economic state changes on the structure of a firm's solvency ratio process (i.e. the parameters of the solvency ratio model) through incorporating information generated from a stochastic model of industrial economic state. The solvency ratio model can simulate many solvency ratio paths and then the solvency ratio distributions of each future period. With the information of solvency ratio distribution and the criteria of insolvency (when solvency ratio is less than one), we can obtain both the probability of a company's shortterm credit risk and the expected ratio of liquidity gap in future periods. To perform a multiperiod firm's shortterm credit risk analysis, this solvency ratio model needs only publicly available information of corporate finance and the industrial economic state (i.e. the industrial cyclicality information). Keywords: Stochastic solvency ratio, Multiperiod. Previously titled: A Solvency Based Multiperiod Corporate Liquidity Crisis Prediction Model Books Referenced in this paper: (what is this?) 