Assessing the default risk of Chinese public companies in the energy industry with the KMV model

Abstract: The structural approach to credit risk modeling has gained a growing attention in both the academics and in the industry. In this dissertation, we outline the basic ideas and structures of the KMV (Merton) model and also explain some related issues before implementing this model. Referring to the KMV model, we use the KMV model to identify the credit risk of listed companies in China. We use real data to examine the default probability of 30 companies (ST and non ST) in the energy sector, and the time period is from 2001 to 2010. Our results indicate that the KMV model has the ability to early identify credit risk in the energy industry of China. Also, the recent share structure reform has affected the credit risk and equity volatility of the firms in the Chinese energy sector.