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Stand-Alone Credit Risk Measures |
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Contact Us |
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Contact Us today to see why Moody's KMV is the right choice.
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Moody's KMV is pleased to announce the forthcoming EDF 8.0 release, which includes the latest enhancements to our public firm EDF™ (Expected Default Frequency) model. We have not altered the underlying modeling approach — we still use the equity market-based structural framework to measure credit risk — but we have substantially improved the model's ability to satisfy the demands of the evolving credit market. Financial institutions (as well as many non-financial corporations) want more granularity across the full spectrum of credit quality, better tools for valuation, and more timely financial statement data. With the EDF 8.0 release, we have addressed each of these needs.
The biggest change is that we have recalibrated the model using a default data set nearly twice as large as our previous sample. This means that the model is now better able to assign a true default probability to the underlying riskiness of a firm. Moreover, we have expanded the range of meaningful EDF values by lowering the floor from 2 basis points (bps) to 1 bp and raising the cap from 20 percent to 35 percent. In addition, we have improved how the model estimates EDF levels beyond one year. The new EDF term structure methodology outperforms the previous approach both in predicting future credit quality and in explaining cross-sectional credit spreads.
We have also introduced two important improvements to our EDF production process. Specifically, we now use semiannual financial statements for non-U.S. firms (previously we used annual statements) and we update the risk-free rate monthly.
Moody's KMV is very pleased with the EDF 8.0 model enhancements, and we are confident they reinforce our position as the leader in credit risk measurement technology. For more information about the release, including rollout details and additional model changes, please see the attached announcement.
Broader Range for EDF Credit Measures
We increased the EDF granularity for firms of both extremely high and extremely low credit quality. In the new model, we lowered the minimum EDF credit measure to 1 basis point (previously 2 basis points) and increased the new maximum EDF credit measure to 35% (previously 20%).
Improved Long-Term Visibility and Fair Value Spread Estimation
Superior approach to calculating long-term EDF credit measures. This is critical when considering longer-term exposure and it allows for a more accurate estimation of a fair value spread for both bonds and CDSs.
More timely information
Semi-annual financial statements are now available for firms outside North America. This better reflects a company’s current capital structure. This results in more accurate EDF credit measures and better-informed credit decisions.
More Information
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