PPT Slide
Key features in KMV model
1. Dynamics of EDF comes mostly from the dynamics of the equity
2. Distance to default ratio determines the level of default risk.
• This key ratio compares the firm’s net worth to its volatility.
• The net worth is based on values from the equity market, so it
is both timely and superior estimate of the firm value.
3. Ability to adjust to the credit cycle and ability to quickly reflect any
deterioration in credit quality.
4. Work best in highly efficient liquid market conditions.