Quantitative credit risk monitoring using purchase order information

Abstract

This paper proposes advanced credit risk assessment using purchase order information from borrower firms. It first introduces a structural credit risk model based on purchase orders and demonstrates the applicability of the model to practical credit risk monitoring with a case study. The estimated default probabilities reflect trends in purchase order volumes and customers' default risk. The proposed model realizes more frequent credit risk monitoring than typical monitoring based on financial statements. Financial institutions can monitor the actual business conditions of borrower firms using the model.