What is the KMV model?

Unlike CreditMetrics™ which calculates a ,Value at Risk due to Credit”, KMV represents a rating model which uses an equity-value-based approach to estimate a firm’s credit risk. The software is based on Merton’s (1974) option pricing approach.

What does KMV stand for in finance?

KMV – Part of Moody’s Analytics. Building upon the legacy of Kealhofer, McQuown, and Vasicek (KMV), Moody’s Analytics further pioneered the sophisticated application of modern financial theory and statistical analysis to manage credit risk more effectively.

What is KMV EDF?

Expected Default Frequency (EDF) is a credit measure that was developed by Moody’s Analytics as part of the KMV model. EDF measures the probability that a company will default on payments within a given period by failing to honor the interest and principal payments.

What is Lgd in banking?

Loss given default or LGD is the share of an asset that is lost if a borrower defaults. It is a common parameter in risk models and also a parameter used in the calculation of economic capital, expected loss or regulatory capital under Basel II for a banking institution.

What is CreditMetrics?

CreditMetrics model is used to analyze and manage credit risk of investment instruments portfolio, unlike other models which are more specialized in the analysis of credit risk of individual investment instruments respectively credit risk of individual companies.

What is a LGD model?

An LGD model assesses the value and/or the quality of a security the bank holds for providing the loan – securities can be either machinery like cars, trucks or construction machines. It can be mortgages or it can be a custody account or a commodity.

What is the difference between EAD and LGD?

The main difference between LGD and EAD is that LGD takes into consideration any recovery on the default. For this reason, EAD is the more conservative measurement as it is the higher figure. LGD is more often the best case scenario that relies on multiple assumptions.