Expected Default Frequency – hosted by Ofer Abarbanel online library

KMV Model

Expected default frequency
• Expected default frequency (EDF) is a forward-looking measure of actual probability of default. EDF is firm specific.

KMV model is based on the structural approach to calculate EDF (credit risk is driven by the firm value process).

– It is best when applied to publicly traded companies, where the value of equity is determined by the stock market.

– The market information contained in the firm’s stock price
and balance sheet are translated into an implied risk of default.

Ofer Abarbanel – Online Library

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