Credit Risk analysis and the KMV-Black and Scholes model: a proposal of correction and an empirical analysis

The first aim of this work is to propose a correction to the KMV Black&Scholes model to assess Credit Risk. The second aim is to perform a comparative empirical analysis, by applying the modified and the non-modified KMV Black&Scholes model and comparing the results.The proposed corrections to the KMV Black&Scholes model regard: (i) the potential coupon detachment for the assessment of the current value of shares and (ii) the use of the t-Student probability distribution to replace the Normal distribution.The proposed model was first tested on a sample of bankrupt firms (listed on the Dax), in order to validate the assumptions. After this preliminary phase, the same model has been applied on a sample of twenty five High-Tech companies listed on the Italian Stock Exchange. Finally, the results of the previous studies have been compared with the ones obtained applying the non-modified model.We maintain that the corrections proposed in this paper can be useful to support a more accurate estimate in assessing the credit risk and an improved perception of a firm’s intrinsic default risk.