A Default Model of The Non-listed Companies Under Asymmetric Information.doc

1、A Default Model of The Non-listed Companies Under Asymmetric InformationAbastract:For the financing difficulties of the non-listed companies, A continuous credit risk model is created which is based on the asymmetric information theory.In the model,the value of the non-listed companies is estimated

2、by the free cash flow,and the loan discussed contains the collateral asset.Based on the model,The default probability,the LGD and the largest company debts are discussed. Keywords: free cash flow; the default probability;recovery rate Credit risk is the main risk that the Chinese banking industry is

3、 facing.Due to the asymmetric information，there generally exist moral hazard and adverse selection behavior in the Chinese credit markets.On the one hand,there exist the high non-performing loans,the single credit structure and the centralized credit risk,On the other hand,the non-listed companies,

4、especially the small and medium companies are facing the financing difficulties, while the banks have a lot of idle funds that are not fully utilized.These reasons will lead to a disorder market,the lack of the companies competitiveness,and the unstability of the financial system. For the financing

5、difficulties of the non-listed companies,a continuous credit risk model based on the asymmetry information theory is created in this article to analyze the default probability,the maximum size of the debt and the recovery rate of the loan.In the model,the value of the non-listed companies is estimat

6、ed by the free cash flow,and from the loan discussed with mortgage to suppress the moral risk. Literature Riview Credit risk analysis is very difficult to quantify,and the traditional credit risk management dependes on the qualitative analysis. In recent years,the credit risk modeling techniques and

7、 the quantitative analysis have made considerable progress,and the scientificalness of the credit risk management has been growing. Based on the company market value and the unobservability of its volatility,the U.S. KMV corporation developed a credit risk model named KMV model in 1995,which was als

8、o called Expected Default Probability model. In 1997 Credit Suisse First Boston (CSFB) Bank developed the Additional Credit Risk+ model.The main idea of this model is that the loss depends on the frequency of disasters and losses caused by disasters or the extent of the damage in the actuarial scien

9、ce. In 1981 Stiglitz and Weiss created the credit rationing and collateral contract theory, and the existence and rationality of the credit rationing equilibrium were discussed.In 1987 AV Thakor and D Besanko created the signal-type loan contracts and the mortgage guarantee theory. In 1984 Watson fo

10、und the incentive loan contracts and collateral theory. Theoretical Analysis The credit risk of a company is mainly decided by the companys repayment ability and the willingness to repay.Free cash flow (FCF) reflect the actual operating conditions of the company to a certain extent,and can effective

11、ly measure the repayment ability.The mortgage can effectively inhibit the moral risk of the company default and reduce the loss caused by the asymmetric information. It is feasible to predict the credit risk from judging the earnings quality of an company through the study of free cash flow,because

12、the change of the credit risk and the volatility of free cash flow are consistent. It this paper,the default is defined as follows: if the cash flow is less than the value of the debt maturity，then the company will default. The debt of a non-listed company is supposed as follows: ， Where D(t) is the

13、 level of debt at time t; is the debt cost service; And that is （1） In the case of asymmetric information,a lot of risk of the companies can not be observed,such as the managers risk preferences,the investment risk,and so on.To a certain extent,the mortgage can effectively guarantee the bank not to

14、take credit rationing under the asymmetric information. It is assumed that the loans have mortgage,and the mortgage asset value is supposed as follows: （2） Where is the drift rate of the asset value; is the volatility of the asset value; V0 is the current value of the collateral; and wt is subjet to

15、 the standard Brown process,as follows: wt N(0,t) By Ito integral, ， It is assumed that the company free cash flow is subject to a mean-reverting stochastic process,as folows: Where (t) is the average return rate of the cash flow; b(t) is the long-term average of the cash flow; is the standard deviation of cash flow volatility; (t), b(t) and are decided by the economic conditions of the company. The financial data of the non-listed companies can