Speaker: Associate Professor Zhen Fang (China Institute of Economics and Management, Central University of Finance and Economics)

Host: Assistant Professor Mao Minghai (Li Anmin Institute of Economics, Liaoning University)

Guest introduction: Professor You Yu (Li Anmin Institute of Economics, Liaoning University)

Time: April 19, 2024 (Friday) 10:00-11:30 (Beijing time)

Location: Conference Room, 1st Floor, Wuzhou Park, Chongshan Campus, Liaoning University

Online Venue: Tencent Meeting: 395-118-442

Language: Chinese/English

abstract：

This paper adopts the Heston stochastic volatility (SV) model and that augmented by price jumps (SVJ) to measure a firm's default risk. We estimate the models by matching a firm's two time-varying series of equity value and volatility. Applying these models to the Growth Enterprises Market in China, we find that the Black-Scholes-Merton (BSM) model produces biased default probability by implicitly setting zero parameters governing stochastic volatility and price jumps. More importantly, we provide empirical evidence supporting the superiority of the SV and SVJ models over the BSM model in distinguishing financially distressed firms, with the SVJ model exhibiting the best performance. This paper suggests that the SV or SVJ default probability, especially its functional form, is more appropriate to measure credit risk.

Introduction to the speaker: Zhen Fang, associate professor employed by the Dean of China's Economic and Management Research at the Central University of Finance and Economics, was awarded a doctorate in finance from University of Otago in New Zealand in May 2017. Her research interests include financial derivatives, mathematical finance, and empirical asset pricing. The paper has been published in international journals such as Journal of Futures Markets, Pacific Basin Finance Journal, and Economic Modeling.