Comparison between CreditMetrics™ and KMV
Comparison between CreditMetrics™ and KMV

Author(s): Yuan Tian, Josef Novotny
Subject(s): Business Economy / Management, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: Economic capital; credit risk; Creditmetrics™; KMV; VaR;
Summary/Abstract: The topic of this paper is comparison between Creditmetrics™ and KMV. The goal is to estimate the benchmarks for both the Creditmetrics™ model and the KMV model, and then compare these two models theoretically and diagrammatically. Credit risk is determined in a portfolio that consists of ten selected quoted companies in the Frankfurt Stock Exchange (FSE) with a total nominal value of 10 million euro and the time horizon is one year, from March 24th, 2016 to March 24th, 2017. Under the framework of Creditmetrics™ and KMV, credit risk associated with the portfolio is quantified in terms of the values of economic capital. After calculating the expected loss and the unexpected loss for the whole portfolio by Creditmetrics™ (at a 99,9% confidence level) and KMV, the values of economic capital, which is the difference between the expected loss and the unexpected loss, equal to 513 316 € and 870 370 €, respectively. The most essential difference between two models is that Creditmetrics™ is a backward-looking model, while KMV is a forward-looking model.

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