KMV credit portfolio model

Discussion in 'P2.T6. Credit Risk (25%)' started by shanlane, Apr 12, 2012.

  1. shanlane

    shanlane Active Member

    Hello,

    I have read in a number of different places that equity prices are the main driver in KMV models. This may be an absurd question, but is this the same KMV that we have been talking about all chapter? If so, it seems like the PD depends on lots of things and I am not quite sure why the equity value is explicitly pointed out as the driver.

    There also seems to be some circular logic since the value of the equity is a function of the face value of the debt and the value of the firm. And to complicate matters, if the equity increases because of some external factor (like an increase in the mean return rate), wouldn't this increase the value of the firm and possibly even increase the value of the debt? I guess I am having a cause/effect problem that I cannot seem to get around.

    If this is answered somwehere else I appologize. If so, please do not be afraid to just post a link, but I have been unable to find anything that addresses this dierectly. It is also possible that I am just making this WAY too complicated:eek:.

    Thanks!

    Shannon

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