A flow-based corporate credit model

Tsung-Kang Chen, Hsien Hsing Liao*, Chia Wu Lu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

The main purpose of this paper is to develop a flow-based corporate credit model. This model can concurrently and endogenously generate a firm's multi-period probabilities of liquidity crunch and expected liquidity shortfalls. This study builds a state-dependent internal liquidity model that incorporates both systematic and idiosyncratic shocks into corporate internal liquidity dynamics. The flow-based credit model differs from structural form credit models in that it considers a flow-based insolvency rather than a stock-based one, and has a potential to capture short-term credit information. Additionally, it differs from both reduced form and traditional accounting-based bankruptcy prediction models in that it is able to provide multi-period expected liquidity shortfalls endogenously.

Original languageEnglish
Pages (from-to)517-532
Number of pages16
JournalReview of Quantitative Finance and Accounting
Volume36
Issue number4
DOIs
StatePublished - 1 May 2011

Keywords

  • Flow-based credit model
  • Internal liquidity
  • Liquidity crunch

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