A flow-based corporate credit model |
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Authors: | Tsung-Kang Chen Hsien-Hsing Liao Chia-Wu Lu |
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Institution: | (1) Department of Finance and International Business, Fu Jen Catholic University, No. 510, Jhongjheng Rd., Sinjhuang City, Taipei County, Taiwan, ROC;(2) Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei City, Taiwan, ROC;(3) Department of Finance, Providence University, No. 200, Chungchi Rd., Shalu Township, Taichung County, Taiwan, ROC |
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Abstract: | The main purpose of this paper is to develop a flow-based corporate credit model. This model can concurrently and endogenously
generate a firm’s multi-period probabilities of liquidity crunch and expected liquidity shortfalls. This study builds a state-dependent
internal liquidity model that incorporates both systematic and idiosyncratic shocks into corporate internal liquidity dynamics.
The flow-based credit model differs from structural form credit models in that it considers a flow-based insolvency rather
than a stock-based one, and has a potential to capture short-term credit information. Additionally, it differs from both reduced
form and traditional accounting-based bankruptcy prediction models in that it is able to provide multi-period expected liquidity
shortfalls endogenously. |
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Keywords: | |
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