FIN-02-052 |
NYU Stern School of Business |
Corporate Distress Prediction Models in a Turbulent
Economic and BASEL II Environment
September 2002
Edward I. Altman
ABSTRACT
This paper discusses two of the primary motivating influences on the recent
development/revisions of credit scoring models, - the important implications of
Basel II’s proposed capital requirements on credit assets and the enormous amounts
and rates of defaults and bankruptcies in the United States in 2001-2002. Two of
the more prominent credit scoring techniques, our Z-Score and KMV’s EDF
models, are reviewed. Both models are assessed with respect to default probabilities
in general and in particular to the infamous Enron and WorldCom debacles in
particular. In order to be effective, these and other credit risk models should be
utilized by firms with a sincere credit risk culture, observant of the fact that they
are best used as an additional tool, not the sole decision making criteria, in the
credit and security analyst process.
Edward I. Altman
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0709
Email: ealtman@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~ealtman
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