Absolute & Relative Credit Quality Assessment
Abstract: The lack of availability and relevance of both credit ratings and traded market instruments, forces nancial institutions to nd alternative ways to validate the credit qualities of their counterparties. To address this issue, existing bankruptcy prediction models are evaluated and re-estimated. Furthermore a new model is constructed that outperforms the previous models in terms of default classication. By adjusting for the rarity of defaults and the utilised sampling techniques, the output of the constructed model becomes more accurate and less biased than previous models. The model is also validated to be rank consistent with US and Nordic S&P ratings as well as with spreads of Credit Default Swaps on the US market.
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